The US economy expanded at an annualised rate of just 1.4% in the fourth quarter, falling sharply from the previous period as a historic federal government shutdown hammered growth while inflation accelerated to levels that complicate the Federal Reserve’s policy options.
Friday’s data from the Bureau of Economic Analysis missed economist expectations by a wide margin, coming in far below the 2.8% consensus forecast and representing a dramatic deceleration from the 4.4% growth rate recorded in the third quarter. The disappointing figure will undercut optimism about US economic strength that President Donald Trump promoted at the World Economic Forum in Davos last month, where he declared the economy was “booming”.
43-Day Shutdown Knocks Full Point Off Growth
The weak performance largely reflects the unprecedented 43-day federal government shutdown that occurred in October and November, which the Bureau of Economic Analysis estimates subtracted a full percentage point from quarterly growth. Government spending declined significantly during the period, while consumer spending also slowed, though business investment provided a modest offset.
“The disappointing end to the year largely reflected a self-inflicted drag from the longest government shutdown in US history,” said Gregory Daco, chief economist at EY-Parthenon. While economists expect the hit to government spending to reverse in the first quarter of 2026 as federal operations resume normal levels, the fourth-quarter weakness highlights the economic cost of political dysfunction.
Inflation Accelerates as Growth Slows
Compounding concerns about slowing growth, the personal consumption expenditures price index—the Federal Reserve’s preferred inflation gauge—rose to 2.9% in December, its highest level since March 2024. The figure climbed from 2.8% in November, moving further from the Fed’s 2% target and making additional interest rate cuts more difficult this year.
Fed policymakers warned in minutes released this week that progress toward their 2% inflation goal “might be slower and more uneven than generally expected,” signalling the central bank’s growing concern about persistent price pressures despite slowing economic activity. The combination of decelerating growth and accelerating inflation presents a challenging scenario for monetary policymakers who must balance supporting economic expansion against controlling price increases.
Stagflation Risks Return After Decades in Exile
The simultaneous appearance of slowing growth and rising inflation evokes uncomfortable memories of 1970s stagflation, when economies stagnated while prices soared. While current conditions aren’t nearly as severe, the trend is troubling: growth dropped from 4.4% to 1.4% while inflation climbed from 2.8% to 2.9%.
If this pattern continues, the Fed faces an impossible choice between cutting rates to support growth or maintaining tight policy to combat inflation. For crypto markets, stagflation scenarios historically drive interest in alternative assets as both stocks and bonds struggle, though Bitcoin’s lack of an extended track record during such conditions makes its response uncertain.
The bigger concern is that policy-induced economic weakness—shutdowns, erratic trade policies, institutional attacks—creates exactly the instability that undermines dollar confidence without providing the fiscal discipline that might justify it.
