US Growth Slows to 0.5% in Q4 as Incomes Fall but Spending Holds

American households face thinner paychecks and prices that refuse to ease. Yet they continue spending at a solid pace. That tension runs through the latest economic reports: slowing growth, a dip in incomes, resilient consumers, all arriving just before heightened tensions with Iran.

The Bureau of Economic Analysis revised fourth-quarter 2025 GDP growth to an annual rate of 0.5 percent, down from its prior estimate of 0.7 percent and well below the third quarter's 4.4 percent surge. For the full year 2025 the economy expanded 2.1 percent, according to the agency, compared with 2.8 percent in 2024. A 43-day government shutdown spanning October and November, triggered by a congressional impasse over spending legislation that included Affordable Care Act subsidies, cut federal spending and investment by an estimated 16.6 percent and subtracted 1.16 percentage points from Q4 growth, per secondary analyses citing BEA figures. The latest revision also reflected weaker private inventory investment, especially in wholesale trade, based on updated Census Bureau data. Gains in information services, healthcare and wholesale trade partially offset declines in federal government activity and nondurable goods manufacturing. Thirty-five states saw GDP rise, led by North Dakota at 3.8 percent; the District of Columbia fell 8.3 percent.

February 2026 brought more mixed signals. Personal income dropped $18.2 billion, or 0.1 percent, the BEA reported. Disposable income fell at the same rate. The decline stemmed from lower personal dividend income, down $39.7 billion, and reduced current transfer receipts, including a $34.4 billion drop in other government social benefits linked to Affordable Care Act enrollment estimates. Wages and salaries rose. Consumer spending, by contrast, increased $103.2 billion, or 0.5 percent, after a 0.3 percent gain the prior month. Purchases of goods rose $58.7 billion and services $44.5 billion, with motor vehicles and parts adding $32.6 billion, healthcare $15.7 billion and financial services $10.4 billion. Year-over-year nominal spending climbed 5.34 percent; real spending, after inflation, rose 0.1 percent in the month and 2.8 percent from a year earlier. The personal saving rate slipped to 4.0 percent from 4.5 percent.

Inflation held steady above the Federal Reserve's target. The core personal consumption expenditures price index, which excludes food and energy, stood at 3.0 percent year-over-year. The headline PCE index rose 2.8 percent from the prior year. The report, delayed more than a week by lingering shutdown effects, covers the period immediately before the U.S. and Iran entered a two-week ceasefire agreement that included reopening the Strait of Hormuz. Labor markets remained steady, with unemployment at 4.4 percent and private-sector job gains continuing, though analysts await the Philadelphia Fed's business outlook survey for fresher regional employment and manufacturing signals.

The numbers paint no simple picture. Growth has clearly decelerated. Incomes softened outside of wages. Consumers nevertheless kept buying, suggesting underlying confidence supported by low layoffs and prior real wage gains. Whether that resilience persists amid geopolitical friction, sticky prices and the risk of further federal spending volatility remains the open question. The BEA itself offered no recession call; the National Bureau of Economic Research defines such periods by sustained, broad declines rather than any arbitrary sub-2-percent threshold. Full-year growth stayed positive. The data releases, stripped of later political overlays, show an economy losing speed yet not stalled, with households still powering demand even as external shocks loomed.