The U.S. economy slowed significantly in the fourth quarter, partly because of the federal government shutdown that lasted for nearly half of the three-month period.

The 2026 fiscal year began on Oct. 1, 2025, without budget legislation having been passed into law. As a result, non-essential government services shut down until lawmakers reached an agreement on Nov. 12.

This contributed to economic activity growing at an annualized rate of just 1.4 percent during the last quarter of the year, according to the Bureau of Economic Analysis. Gross domestic product (GDP) expanded by 4.4 percent and 3.8 percent in the preceding two quarters. (The first estimate of Q4 growth is typically released in late January, but it was delayed for several weeks because of the shutdown.)

The bureau estimated that the reduction in labor services provided by government employees reduced GDP growth by 1 percentage point. It noted, though, that this does not necessarily capture the full economic impact of the shutdown.

A slowdown in consumer spending during the fourth quarter also contributed to the drop in growth.

For 2025 as a whole, the economy grew by 2.2 percent, down from 2.8 percent in 2024. Consumer spending, as always, was the main engine for growth, but The New York Times noted that, last year, “spending was concentrated among wealthier households, whose incomes were lifted by the rising stock market.”

The Times went on to quote the chief U.S. economist for Morgan Stanley as saying that that divergence “helps explain why the average household is frustrated with an economy that seems to be clicking on all cylinders. It’s clicking on all cylinders for a few people, but not for everyone.”

Separately, the director of the Index of Consumer Sentiment from the University of Michigan’s Surveys of Consumers, observed that, “A sizable month-to-month increase in sentiment for the largest stockholders was fully offset by a decline among consumers without stock holdings.” The index was largely unchanged from January to February but was 12.5 percent lower than a year earlier.

The Conference Board’s Consumer Confidence Index, meanwhile, fell more than 10 percent from December to January. The board’s chief economist said the index is now at “its lowest level since May 2014 – surpassing its COVID-19 pandemic depths.”

In January, the economy added 130,000 jobs, with notable gains in health care, social assistance and construction, the Bureau of Labor Statistics reported. The unemployment rate is now 4.3 percent. The bureau also revised downward job estimates in 2025 by more than 400,000, putting net job creation for the year at just 181,000 positions, the weakest annual number since 2020. Excluding the pandemic year, 2025 had the lowest total since 2003. Job creation in 2024 was 1.46 million.

Job growth totals in 2025 were significantly reduced by cuts in government employment driven by the now-dissolved Department of Government Efficiency (DOGE). Since October 2024, federal civilian employment is down 327,000 (about 11 percent of the government workforce), including a decrease of 34,000 in January that resulted from deferred resignations.

Inflation eased somewhat in January, with the Consumer Price Index showing a 2.4 percent increase over the previous 12 months, down from 2.7 percent in both November and December, the Bureau of Labor Statistics reported. Shelter costs, which account for 30 percent of the overall index, increased by 3 percent.

The Federal Reserve in January, following quarter-point interest rate reductions in each of its three previous meetings, left the target range for the federal funds rate unchanged at 3.5-3.75 percent. Two of the 12 members of the central bank’s Federal Open Market Committee opposed the move, arguing instead for another quarter-point cut.

Minutes of the January meeting noted “the possibility that upward adjustments to the target range for the federal funds rate could be appropriate if inflation remains at above-target levels.” Given the recent, largely unimpressive GDP and labor market numbers, though, an increase seems less likely, at least in the short term. The Fed’s target inflation rate is 2 percent, but prices have increased at a faster rate than that every month since February 2021.

Tariffs continue to be a significant economic variable after the Supreme Court decision announced on Feb. 20 that struck down the levies President Trump imposed last year under the 1977 International Emergency Economic Powers Act (a statute that makes no mention of tariffs). Trump immediately responded to the ruling by implementing a 10 percent – soon raised to 15 percent – global tariff using another law that requires congressional approval after 150 days. It is unclear, at this point, if tariff refunds will be sought or granted. There could also be effects on trade agreements negotiated in the past year, federal budgeting that assumed a certain level of tariff revenue, general business activity, and pricing.

One positive indicator for the economy is that the Institute for Supply Management’s Purchasing Managers Index increased nearly 10 percent from December to January, putting it over the threshold indicating expansion in the manufacturing sector for the first time in a year. Nine industries reported growth during the month, while eight reported contraction.

“Looking at the manufacturing economy, 20 percent of the sector’s gross domestic product contracted in January, compared to 85 percent in December, and the percentage of manufacturing GDP in strong contraction decreased to 12 percent, compared to 43 percent in December,” the chair of the institute’s Manufacturing Business Survey Committee said.

Housing starts increased 6.2 percent from November to December but were 7.3 percent below the December 2024 level, according to the U.S. Census Bureau and the Department of Housing and Urban Development.

Existing home sales fell 8.4 percent from December to January and were down 4.4 percent year over year, the National Association of Realtors reported.

“The below-normal temperatures and above-normal precipitation this January make it harder than usual to assess the underlying driver of the decrease and determine if this month’s numbers are an aberration,” the association’s chief economist said.

The median existing home sales price in January was $396,800, 0.9 percent higher than a year before.

The Dow Jones Industrial Average closed at 49,625.97 on Feb. 20, 3.3 percent higher than the start of the year. The S&P 500 Index ended the day at 6,909.51, for a year-to-date gain of just under 1 percent.

The dollar on Feb. 20 was trading at 0.85 euros, 0.74 pounds, 155.18 yen and 6.91 yuan.