GDP slows as government shutdown drags on economy

The Bureau of Economic Analysis reported Q4 2025 GDP growth at 1.4% on an annualized basis, released on February 20, 2026. Economists surveyed by LSEG had forecast 3.0% growth, making the 1.6-percentage-point miss one of the largest GDP surprises in recent years.

The government shutdownGovernment ShutdownA lapse in federal funding that forces non-essential agencies to halt operations when Congress fails to pass appropriations legislation or a continuing resolution before money runs out.Key ConceptGovernment ShutdownA lapse in federal funding that forces non-essential agencies to halt operations when Congress fails to pass appropriations legislation or a continuing resolution before money runs out.Open conceptBookmark ran 43 days, from October 1 through November 12, 2025, surpassing the 35-day shutdown of 2018-2019 to become the longest in U.S. history. The Congressional Budget Office estimated that each week of closure cost roughly $7 billion in lost economic output.

BEA estimated the shutdown subtracted approximately 1.0 percentage point from Q4 GDP growth, as both defense and nondefense federal consumption expenditures for employee compensation declined sharply. Without the shutdown drag, GDP would have grown closer to 2.4%.

About 670,000 federal workers were furloughed during the shutdown, while roughly 730,000 others continued working without pay. The CBO estimated the shutdown cost $3 billion in back pay alone, plus $2 billion in lost IRS tax revenues from reduced enforcement.

Core PCE inflation — the Federal Reserve's preferred price measure — came in at 2.7% for Q4, while the year-over-year rate hit 3.0% in December. That's a full percentage point above the Fed's 2% target, reducing the likelihood of near-term interest rate cuts.

Real final sales to private domestic purchasers — the sum of consumer spending and business investment — grew 2.4% in Q4, compared with 2.9% in Q3. This measure strips out government spending and trade, showing that underlying private demand remained relatively healthy despite the headline GDP weakness.

The shutdown began after Senate Democrats blocked a House-passed continuing resolutionContinuing ResolutionA temporary spending bill that keeps the government funded when full appropriations bills haven't passed.Key ConceptContinuing ResolutionA temporary spending bill that keeps the government funded when full appropriations bills haven't passed.Open conceptBookmark on October 1, 2025. It ended when eight Senate Democrats joined Republicans to advance an updated funding deal that included a commitment to vote on extending Affordable Care Act premium subsidies.

The CBO projected that much of the lost economic activity from furloughed workers was unrecoverable — lost working hours can't be made up — though federal purchases and back pay did resume after the shutdown ended on November 12.