The U.S. economy grew far more slowly than previously estimated in the final three months of 2025, according to data released Friday by the Bureau of Economic Analysis. The agency's second estimate for fourth-quarter GDP placed annualized real growth at just 0.7%, a downward revision of 0.7 percentage points from the initial reading of 1.4% and significantly below the Dow Jones consensus forecast of 1.5%. The reading represented a dramatic deceleration from the 4.4% growth rate recorded in the third quarter of 2025.
BEA attributed the downward revision to weaker-than-expected consumer spending, government outlays, exports, and investment. The agency estimated that the partial government shutdown that ran from October through mid-November subtracted approximately one full percentage point from fourth-quarter growth, though it was unable to quantify the complete impact. For the full year 2025, GDP posted a 2.1% gain, one-tenth of a percentage point below the prior estimate and down from the 2.8% pace seen in 2024.
The GDP report was released alongside inflation data that added further complexity to the economic outlook. The Personal Consumption Expenditures price index — the Federal Reserve's preferred gauge — rose 2.8% year over year in January, edging down from 2.9% in December. However, core PCE, which strips out volatile food and energy prices, accelerated to 3.1% on a 12-month basis from 3.0% previously, climbing to its highest level in recent months and signaling that underlying price pressures remain stubborn.
The combination of slowing growth and sticky inflation has reignited debate about stagflation — a scenario in which the economy suffers simultaneously from weak expansion and elevated prices. That risk is particularly acute now given the energy price shock triggered by the closure of the Strait of Hormuz, which analysts expect to filter into consumer prices in coming weeks and months.
Market strategists were quick to draw sobering conclusions. David Russell, global head of market strategy at TradeStation, described the GDP revision as a meaningful gut-check entering the current energy crisis, warning that the soft data suggests the economy entered the geopolitical shock from a position of weakness. Sonu Varghese, chief macro strategist at the Carson Group, said the inflation picture was already deteriorating before the Middle East conflict escalated, and suggested the Federal Reserve may not only forgo rate cuts in 2026 but could eventually face pressure to raise rates later in the year.
Federal Reserve Chair Jerome Powell and the Federal Open Market Committee are scheduled to meet next week, with markets now broadly pricing out any rate reduction in the near term. The surge in Treasury yields — with the 10-year note rising to 4.26% — reflects investor recalibration of rate expectations and is already filtering into mortgage markets, where the average 30-year fixed rate climbed sharply to 6.11% in the week ended March 12, the largest weekly increase since last April's tariff-driven bond market spike.
Credit-sensitive sectors including real estate, utilities, and consumer discretionary stocks faced headwinds Friday as yields remained elevated. Bank stocks are similarly pressured as the prospect of a higher-for-longer rate environment combined with deteriorating economic growth raises concerns about loan quality. Investors will be watching next week's Fed meeting closely for any signal that policymakers are prepared to adjust policy in the face of both slowing growth and persistent inflation.