WASHINGTON (TNND) — The U.S. economy slowed at the end of 2025 as growth was weighed down by the record-length government shutdown and reduced consumer spending.
Gross domestic product, the total output of the economy’s goods and services, increased 1.4% in the fourth quarter. It was a slowdown from the robust gain of 4.4% in the third quarter and 3.8% in the April-to-June period.
Growth was dragged down by the six-week government shutdown in the fall that economists estimate shaved 1 percentage point off fourth-quarter growth and a pullback in consumer spending to end the year. The effects of the shutdown are expected to be short-lived after furloughed workers received backpay and the end of the shutdown restored government spending.
Overall, the economy grew by 2.2% in 2025, compared with 2.3% the year prior. It was a volatile year for businesses fueled by uncertainty from erratic tariff rollouts and reversals that upended supply chains but another that highlighted the resilience of American consumers and companies.
“The real story is a tug of war where resilient consumers and a massive AI infrastructure boom are fighting against fiscal drag and trade headwinds,” Bankrate Senior Economic Analyst Mark Hamrick said.
Consumer spending, the primary driver of the U.S. economy, increased 2.4% in the fourth quarter and climbed 2.2% over the full year. Despite years of elevated inflation and gloomy attitudes about the state of the economy, Americans have broadly continued to spend and keep it on track. Consumer spending makes up roughly two-thirds of GDP.
The economy is in solid condition by several measures. Unemployment is near historic lows at 4.3%, inflation fell over the last year to 2.4% and consumers kept spending. But economists see a more complicated picture beneath the surface with high-income households driving most of the spending, job creation having its worst year since 2020 with only 181,000 jobs added in 2025 and price pressures from tariffs still lingering.
“Buyers beware: strong aggregate GDP growth may be masking underlying fragilities,” said Gregory Daco, EY-Parthenon’s chief economist. “Economic momentum rests on a relatively narrow foundation of three ‘’A’ pillars – affluent consumers, AI-driven investment, and asset price appreciation. Less affluent households and small- to mid-sized businesses remain more exposed to affordability and income pressures, and are less likely to benefit from wealth effects or AI-related gains.”
Much of the country’s economic growth is also being driven by investments in artificial intelligence. Sales of information-processing equipment used to power the tech accounted for nearly half of overall GDP growth in the fourth quarter. The reliance on AI could be a vulnerability for the economy if investors shift their attitude toward the industry.
Tariffs didn’t have the catastrophic impact on the economy that was widely predicted upon Trump’s “Liberation Day” in April after many were reduced from rates that were initially announced or reversed in trade deals. Businesses may be in for another year of tariff-induced uncertainty after the Supreme Court ruled Trump exceeded his authority in slapping levies on essentially every country in the world and opt to hold off on new investments until they get more clarity.
Tariffs have been a cornerstone of Trump’s economic agenda since returning to the White House that have been leveraged in unprecedented ways through emergency powers. While his primary route was struck down by the Supreme Court, Trump still has other means to impose them, though they are more onerous and have limits.
Most forecasters are expecting growth to continue in 2026 thanks to tax reductions passed by Congress last year, giving a boost to consumers and businesses. Last year’s rate cuts from the Federal Reserve could also provide more wiggle room to support spending and business investments. More cuts will likely be harder to come by this year with inflation still lingering and the economy growing, and officials may be more cautious with renewed unknowns about tariffs.
Consumer spending may also be hitting a wall with debt piling up and households cutting back on savings to get by. Credit card debt hit a new record in 2025 at $1.28 trillion, a 5.5% increase from the previous year, according to Federal Reserve Bank of New York data. More Americans are also carrying balances and falling behind on payments for credit cards, mortgages and auto loans.
Wage growth continued to outpace inflation in 2025, but the margin narrowed with slower hiring and employers reining in pay increases.
“While restrained hiring and wage moderation are helping businesses contain costs and protect margins, they are also contributing to softer household income growth at a time when elevated prices continue to weigh on demand. This dynamic is making the expansion more uneven, less inclusive, and ultimately less resilient,” Daco said.