Q4 U.S. GDP: Lower Than Expected

Figure 1: U.S. GDP Annualized (%)

Source: Datastream/Continuum Economics      

Lower than expected 1.4% number for Q4 GDP was due to a larger than expected decline in government spending caused by the shutdown.  This is a temporary factor and the 2.4% real final sales for domestic purchases is more representative of the underlying trend. Net exports were also a small drag on the quarter, as the trade deficit had moved higher through the quarter with the December figures yesterday. This reflects the fact that tariffs have now largely feedthrough and imports are returning to more normal levels.

Consumer spending at 2.4% remains solid helped by a 3.4% rise in services.  However, goods consumption actually fell -0.1% on the quarter.  We have highlighted that consumption has been outstripping wage growth, which had prompted a decline in the household savings ratio.  This has stretched too far and 2026 will likely see a slowing of consumption down towards income growth.  Q1 could see income helped by the tax rebates from the BBB, but some of this could be saved given the rundown of savings.

Elsewhere, fixed investment was helped once again by the AI boom, with a 7.4% rise in Intellectual property products and 3.4% in non-residential equipment. Hyperscalers are committed to the AI build out with USD600bln for 2026, which should ensure that this part of fixed investment continues to support the economy.  However, non-residential structures (-2.4%) continued to remain a negative drag on GDP, as the excess of office space acts as a drag on new building.  Residential investment at -1.5% improved versus the poor Q3 outcome in line with the monthly figures seen during the quarter.  However, the sub sector remains impacted by high mortgages rates, which are acting as a drag on home sales and low consumer confidence is making some households cautious on large purchases like houses and cars.

For the Fed, the breakdown of the data is better than the headline and taken in combination with other recent data is unlikely to change the view that the economy was reasonably solid end 2025.  However, some slowing is to be expected into 2026 and the Fed will also take this view.  The core PCE for December also came in slightly higher than expected at 0.4%, which pushed the Yr/Yr rate up from 2.8% to 3.0%. Some at the Fed will also take note of the higher than expected Q4 GDP price index at 3.6% versus 2.8% expected.  Combined with recent statements, plus the January FOMC minutes, today’s data will leave the impression that the Fed is happy to keep rates on hold in March and April.  Even so, core PCE should come down through the year and combined with a consumption slowdown should produce a more active debate on new rate cuts.  We favour 25bps in June and September.