The Commerce Department revised fourth-quarter GDP growth down to just 0.7% on an annualized, seasonally and inflation-adjusted basis, a significant decrease from the previous estimate of 1.4% and well below the Dow Jones consensus forecast of 1.5% [1]. This marks a considerable slowdown from the 4.4% gain in the prior period, with the revision attributed primarily to a record-long government shutdown that caused government spending to tumble by 16.7% [1]. For the full year, GDP increased by 2.1%, which is one-tenth of a percentage point lower than the previous reading, while the economy grew at a 2.8% pace in 2024 [1].
The Bureau of Economic Analysis (BEA) cited adjustments in consumer and government spending and exports as reasons for the downward revision, with a smaller decline in imports than previously estimated [1]. Consumer spending rose 2% for the quarter, following a 0.4 percentage point downward revision, and represented a decline from the 3.5% increase in the third quarter. The largest contributor to the downward revision was reduced spending on services, particularly health care [1].
Inflation readings for January were mostly in line with estimates but remained above the Federal Reserve's target. The personal consumption expenditures (PCE) price index, the Fed's primary inflation gauge, rose 0.3% for the month, resulting in an annual rate of 2.8%. Economists had expected monthly and annual readings of 0.3% and 2.9%, respectively [1]. Core PCE inflation, which excludes volatile food and energy costs, increased 0.4% in January and 3.1% over the past 12 months, 0.1 percentage point higher than December [1]. Fed officials focus more closely on the core reading as a better indication of longer-run inflation trends [1].
A separate Commerce Department report showed that orders for durable goods were flat in January, missing the estimate for a 1.3% gain, though this was an improvement from the 0.9% decline in December. Excluding transportation, orders rose 0.4% [1]. David Russell, global head of market strategy at TradeStation, commented, "The big downward revision in GDP is a gut check going into this energy crunch, increasing the risk of stagflation. The soft January durable goods data also suggests the economy entered this crisis weaker than hoped. This creates challenges for investors with PCE inflation still running well above the Fed's target" [1].
Although the data is somewhat dated, it provides a snapshot of inflation pressures and economic growth as the US heads into a Supreme Court decision voiding many of President Donald Trump's tariffs exercised under provisions in the International Emergency Economic Powers Act [1].
CONCLUSION
The sharp downward revision in GDP growth and persistent core inflation above the Federal Reserve's target highlight mounting economic challenges. Weak durable goods data and reduced government spending signal a fragile economic environment, raising concerns about stagflation. Investors face increased uncertainty as inflation pressures remain elevated and growth slows.