US economic growth weaker than thought in fourth quarter with government shutdown, consumer pullback

U.S. economic growth decelerated to 1.4% in the fourth quarter of last year, down significantly from the robust 4.4% expansion in the previous quarter, according to Commerce Department data released Friday. The slowdown was largely attributed to the six-week federal government shutdown and a notable pullback in consumer spending.

The sharp decline in government expenditures resulting from the shutdown reduced overall growth by a full percentage point. Federal government outlays plunged nearly 17% during this period, though economists expect this decline to largely reverse in coming quarters as normal operations resume.

Consumer spending, while still growing at a solid 2.4% rate, showed a marked cooling compared to the 3.5% gain recorded in the third quarter. This moderation raises questions about the sustainability of consumer-driven growth, particularly as households have been taking on more debt and saving less to maintain their spending habits.

The personal savings rate dropped to just 3.6% in the fourth quarter, the second-lowest figure recorded since August 2008 during the Great Recession. This potentially concerning trend suggests many Americans are stretching their financial resources thin to support their consumption patterns.

“The economy looks golden on paper, but beneath the surface is lead,” said Diane Swonk, chief economist at KPMG. She described the current economic landscape as “one-legged,” primarily boosted by artificial intelligence investments that have fueled business spending and lifted stock values, benefiting households with market investments.

Despite the overall slowdown, economists found reasons for cautious optimism in the underlying data. A measure of core economic health focusing on consumer and business spending remained relatively healthy at 2.4%. Martha Gimbel, executive director of the Budget Lab at Yale and former Biden White House economist, characterized the report as “not disastrous,” noting that both consumers and businesses continued spending at a “reasonably solid” pace.

The economic data comes at a politically sensitive time, arriving just days before President Donald Trump’s State of the Union address scheduled for Tuesday, where he is expected to portray the economy as booming. Earlier on social media, Trump blamed congressional Democrats for the government shutdown, claiming it “cost the U.S.A. at least two points in GDP.” He also renewed criticism of Federal Reserve Chair Jerome Powell for not reducing interest rates more aggressively.

Adding complexity to the economic picture, the Supreme Court on Friday struck down many of Trump’s tariffs, which economists note have slightly increased inflation and potentially discouraged hiring by raising business costs. In response, Trump quickly promised to reimpose the tariffs under different legal authorities.

In a separate report released Friday, inflation according to the Federal Reserve’s preferred measure accelerated in December, as prices for goods including furniture, clothing, and groceries increased. This development makes it less likely the Fed will cut interest rates in the near term.

The economic data highlights an unusual paradox: steady growth without significant job creation. While the economy expanded at a solid 2.2% in 2023, employers added fewer than 200,000 jobs last year—the weakest job growth since the COVID-19 pandemic began in 2020.

Economists attribute this disconnect to several factors, including the administration’s immigration restrictions that have slowed population growth and reduced the available workforce. Some businesses may also be hesitant to hire amid uncertainty about artificial intelligence’s potential to increase productivity without additional employees.

Consumer sentiment presents another economic puzzle. Despite the relatively solid growth figures, low unemployment, and moderating inflation, surveys show Americans remain generally pessimistic about economic conditions. In January, a measure of consumer confidence fell to its lowest level since 2014, yet consumer spending has continued to support economic expansion.

This disconnect between economic data and public sentiment reflects what some analysts describe as a “K-shaped” recovery, where economic benefits are disproportionately flowing to higher-income Americans while others continue to struggle with affordability challenges in housing, food, and other essentials.