Q4 2025 GDP grows just 1.4% after the 43-day federal funding lapse subtracts a full percentage point from output
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The United States economy grew at an annualized rate of just 1.4% in the final quarter of 2025—a steep drop from 4.4% the quarter before and well below the 2.5% that forecasters expected. The Bureau of Economic Analysis (BEA) estimates that the 43-day government shutdown, the longest in American history, subtracted roughly one full percentage point from growth by itself. Federal spending fell at a 16.6% annualized rate during the quarter, dragging headline output down by more than a percentage point even as consumer spending and business investment continued to expand.
The report compounds a difficult picture for policymakers. Inflation, as measured by the personal consumption expenditures (PCE) price index the Federal Reserve watches most closely, rose to 2.9%—still well above the Fed's 2% target. That combination of weakening growth and sticky prices narrows the Fed's room to cut interest rates, even as markets push for relief. The data release itself was delayed three weeks—from January 29 to February 20—because the shutdown disrupted the BEA's own data-collection operations, meaning investors and the Fed were flying partially blind during a critical stretch.
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Fictional AI pastiche — not real quote.
"How deliciously instructive: when the government shuts down, consumers and businesses *expand* — and only when Washington resumes its "essential" functions does anyone claim to notice the wound. The shutdown did not subtract from the economy; it merely made visible what the spending had been concealing."
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The Commerce Department agency responsible for producing the official gross domestic product estimates and other national economic statistics.
The nonpartisan federal agency that provides economic and budgetary analysis to Congress.
The US central bank responsible for setting monetary policy, including the federal funds rate that influences borrowing costs throughout the economy.
President Trump writes on Truth Social that "The Democrat Shutdown cost the U.S.A. at least two points in GDP" and calls for lower interest rates, 40 minutes before the BEA's 8:30 a.m. publication.
The BEA reports fourth-quarter growth of 1.4%, missing the 2.5% consensus by more than a full percentage point. The shutdown subtracted an estimated 1.0 point; core PCE inflation rose to 3.0%.
The Federal Reserve holds rates steady at 3.5%–3.75%. Two governors dissent, favoring a cut. Powell says the economy is on "firm footing" but acknowledges quarterly GDP is "lumpy."
The BEA formally reschedules the Q4 GDP advance estimate from January 29 to February 20, with subsequent releases also pushed back through April.
The BEA releases its delayed initial estimate for Q3, showing robust 4.4% annualized growth—the last quarter unaffected by the shutdown.
The Federal Reserve cuts rates by 25 basis points to 3.5%–3.75%, though internal divisions over the decision signal a potential pause ahead.
President Trump signs a continuing resolution funding the government through January 30, 2026, ending the longest shutdown in US history. The bill includes reversal of federal employee firings and full SNAP funding through September 2026.
The CBO estimates the shutdown has already cost $18 billion in lost output and projects permanent losses of $7–14 billion depending on duration.
The Department of Agriculture announces that Supplemental Nutrition Assistance Program benefits for 42 million Americans will not be issued for November due to the shutdown.
The federal government shuts down after Senate Democrats block a House-passed continuing resolution. Approximately 670,000 federal workers are furloughed and 730,000 are required to work without pay.
The Congressional Budget Office publishes a pre-shutdown analysis estimating a funding lapse could reduce Q4 GDP growth by up to 2 percentage points.
The Federal Reserve cuts the federal funds rate by 50 basis points, its first reduction in this cycle, citing a cooling labor market.
Growth accelerates sharply in the second quarter, driven by consumer spending and business investment.
The BEA reports the US economy contracted at an annualized rate of 0.3% in Q1 2025, later revised to -0.5%. Increased imports and reduced government spending drive the decline.
Discussed by: Congressional Budget Office, Goldman Sachs Research, Morgan Stanley
The CBO projected that the first quarter of 2026 would see a GDP growth boost of roughly 2.2 percentage points as federal spending resumes and back-pay reaches workers. If this rebound materializes, Q1 growth could reach 3–4%, and the Fed would have cover to maintain its pause. Inflation staying above target reinforces the hold. This is the baseline scenario most analysts are working with—a statistical pothole, not a structural break.
Discussed by: J.P. Morgan, KPMG economists, dissenting Fed Governors Miran and Waller
If the Q4 weakness reflects more than just the shutdown—if consumer spending continues to soften and job growth remains tepid—the Fed faces a genuine dilemma. Cutting rates while inflation sits at 3% risks undermining credibility, but holding too long risks tipping the economy into contraction. J.P. Morgan has flagged this "stagflation lite" scenario, where the Fed is forced to prioritize the growth side of its dual mandate. Markets are currently pricing in at most two cuts in 2026, suggesting some probability is being assigned to this path.
Discussed by: Committee for a Responsible Federal Budget, Brookings Institution
The continuing resolution that ended the shutdown only funds the government through January 30, 2026, and subsequent stopgap measures have not resolved the underlying appropriations standoff. Trump's own Truth Social post warned that Democrats are pursuing another shutdown "in mini form." A second funding lapse in 2026 would extend the data disruption at the BEA and other statistical agencies, compound federal contractor losses that the CBO says are never fully recovered, and further erode consumer and business confidence. The 2025 shutdown already destroyed an estimated $11 billion in permanent economic output.
Discussed by: Stanford Institute for Economic Policy Research, Rabobank, US News recession watch analysts
The Q4 GDP miss coincided with a major Supreme Court ruling striking down President Trump's emergency tariffs. If new trade measures are reimposed through different legal authority, the combination of tariff-driven price increases, persistent core inflation at 3%, and a labor market that added fewer jobs in 2025 than any non-recession year in decades could push the economy into a technical recession. Recession probability estimates have fallen from 40% to 30% but remain elevated. This scenario turns the GDP miss from a one-quarter anomaly into the leading edge of a downturn.
A 35-day partial shutdown over border wall funding—then the longest in US history—furloughed roughly 380,000 federal workers. The CBO estimated it reduced Q4 2018 GDP by 0.1 percentage points and Q1 2019 GDP by 0.2 points, permanently destroying $3 billion in output.
GDP rebounded quickly once government reopened. The economy grew 3.1% in Q1 2019 after the shutdown ended, as federal spending and back-pay flowed through.
The episode established a template: shutdowns create a visible GDP drag followed by a mechanical rebound, with a small but permanent loss. It also showed that financial markets largely shrug off shutdowns, treating them as temporary noise.
The 2025 shutdown was eight days longer, affected more workers (670,000 furloughed versus 380,000), and hit during a full quarter rather than spanning two. Its estimated 1.0 percentage point GDP drag dwarfs the 2018–2019 impact, suggesting the damage scales non-linearly with duration and breadth.
A 16-day shutdown over Affordable Care Act funding furloughed about 800,000 federal employees. The CBO estimated it subtracted 0.3 percentage points from Q4 2013 annualized GDP growth and permanently reduced output by $2 billion.
The economy bounced back in Q4 2013 with 3.8% growth. Standard & Poor's estimated the shutdown cost the economy $24 billion when including broader ripple effects on consumer and business confidence.
The 2013 episode, combined with sequestration budget cuts, contributed to a broader narrative about fiscal brinksmanship damaging US economic credibility. It helped catalyze the Bipartisan Budget Act of 2013, which temporarily eased spending caps.
The 2013 shutdown was less than half as long as the 2025 episode but still measurably dented growth and eroded confidence. The pattern of a short-term statistical distortion masking real permanent losses—estimated by the CBO at $11 billion for 2025—is consistent across all three episodes.
The US economy contracted by 2.1% in Q1 2014, shocking markets that had expected modest growth. The extreme "polar vortex" winter was blamed for suppressing construction, retail, and transportation activity. Initial reports triggered recession fears before revised data and a strong Q2 rebound calmed markets.
GDP surged to 5.0% in Q2 2014 as pent-up demand was released. Markets quickly reclassified the Q1 number as weather-driven noise rather than a fundamental shift.
The episode became a case study in how one-off disruptions—weather, shutdowns, inventory swings—can produce dramatic quarterly GDP figures that do not reflect underlying economic health. It reinforced the practice of looking at multi-quarter averages.
The Q4 2025 GDP miss is structurally similar: a known external disruption (shutdown instead of weather) producing a dramatic single-quarter deceleration. The key question is whether, like 2014, the rebound will be swift and complete—or whether underlying weakness in consumer spending and persistent inflation make this quarter different.