The U.S. economy grew at a revised annualized rate of 0.7% in the fourth quarter of 2025, according to the second estimate released Friday by the Commerce Department's Bureau of Economic Analysis. This marked a significant downgrade from the advance estimate of 1.4% issued on February 20 and came in below economists' expectations of around 1.5%.

The slowdown followed robust expansions of 4.4% in the third quarter and 3.8% in the second quarter. For the full year 2025, real GDP rose 2.1%, a slight revision down from the prior reading of 2.2% and slower than the 2.8% increase in 2024.

A primary drag on growth was federal government spending and investment, which plunged at a 16.7% rate and subtracted 1.16 percentage points from GDP. Economists attributed much of this to the 43-day government shutdown that occurred last fall, which disrupted federal operations and spending. Consumer spending, the largest component of GDP, increased at a 2% pace, revised down from an initial 2.4% estimate and a deceleration from 3.5% in the third quarter.

Business investment excluding housing rose 2.2%, down from 3.2% in the prior quarter and the initial Q4 projection of 3.7%. Exports fell at a 3.3% annual rate, steeper than previously estimated, while an underlying measure of private domestic demand grew 1.9%, revised lower from 2.4%.

The revision highlighted broader challenges entering 2026. The job market showed signs of weakness, with 92,000 jobs lost last month and monthly job gains averaging under 10,000 in 2025, the weakest outside recession years since 2002. Separate data released Friday showed core PCE inflation, the Federal Reserve's preferred gauge, rising to 3.1% over 12 months in January, up from December and above the central bank's 2% target.

Economists pointed to rising stagflation risks amid weak growth and persistent inflation pressures. David Russell of TradeStation noted the revision as a 'gut check' ahead of energy market strains. Sonu Varghese of Carson Group said inflation data suggested the Fed would hold rates steady in 2026 or even consider hikes. A final GDP estimate for the quarter is due April 9.