US GDP (Q4 2025 – first estimate)

A self-inflicted black eye in Q4, but an otherwise resilient year

• Real GDP fell short of elevated expectations in Q4 2025, advancing a lackluster 1.4% annualized, following an impressive 4.4% expansion in Q3. For the full year — despite pronounced trade gyrations and a rare constellation of supply shocks stemming from a new US trade regime, rapid artificial intelligence (AI) adoption and a historic plunge in immigration — real GDP rose 2.2%, just a tick above our December 2024 forecast.
   
• The disappointing end to the year largely reflected a self-inflicted drag from the longest government shutdown in US history. Real final sales advanced 1.2%, while inventories added 0.2 percentage point (ppt) to headline GDP growth. Still, private sector domestic demand remained robust, with consumer spending powering the expansion. Consumption rose 2.4%, propelled by affluent households’ spending on services even as purchases of pricey durable goods pulled back. Business investment increased a healthy 3.7%, driven by the AI investment boom and solid equipment outlays, even as infrastructure spending declined. Housing activity remained depressed, with residential investment falling every quarter in 2025, down 1.5% in Q4. Net trade added a couple of tenths to growth as imports fell faster than exports. Government spending subtracted 0.9ppt from real GDP growth, reflecting a shutdown-induced 17% plunge in federal outlays.
   
• Stepping back from the high-frequency data, the solid expansion in 2025 was notably jobless, with only 181,000 jobs added. This reflects businesses doing more with less in a high-cost, high-interest-rate environment. Productivity gains over the past two years have been largely organic — driven by business leaders’ focus on extracting more from capital and labor through longer tenures, better training, organizational streamlining and efficiency improvements. Elevated capital costs have reinforced discipline around returns and investment decisions. AI is now building on this strong foundation and is likely to broaden productivity gains, early signs of which are emerging across select sectors and firms.
   
• Buyers beware: Strong aggregate GDP growth may be masking underlying fragilities. 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.
   
• 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. Looking ahead, we expect real GDP to grow 2.4% in 2026, with consumer spending likely to moderate amid persistent affordability pressures.
   
• The latest Fed minutes indicate Kevin Warsh is likely to inherit a hawkish Fed with policymakers only likely to resume easing for clear “good” reasons — convincing progress on inflation toward 2% — or “bad” reasons — a meaningful weakening in the labor market. We expect insufficient evidence of either in the first half of the year, keeping the Fed on hold at least until June. We have shifted our first rate cut to July (from June) and, while we still anticipate 50 basis points of easing in 2026 on moderating inflation and a mildly softer labor market, the risk of less easing is real.

The views reflected in this article are the views of the author(s) and do not necessarily reflect the views of Ernst & Young LLP or other members of the global EY organization.