Fourth-quarter GDP revised down to just 0.7% growth; January core inflation was 3.1%

Economic growth was much slower than expected in the final three months of 2025, while core inflation rose to start 2026, the Commerce Department reported Friday.

Gross domestic productA measure of all goods and services produced in the expanding U.S. economy grew at a seasonally and inflation-adjusted annual rate of just 0.7% in the fourth quarter of 2019, according to the department’s Bureau of Economic Analysis.

The first revision of the GDP reading showed a sharp decline from the previous forecast of 1.4% and well below the Dow Jones consensus forecast of 1.5%. It also marked a significant slowdown from the 4.4% gain in the previous period.

For the whole year, GDP increased by 2.1%; This is about one-tenth of a percent lower than the previous reading. In 2024, the economy grew by 2.8%.

According to BEA, the downward revision was driven by adjustments in consumer and government spending and exports. The decline in imports, which technically falls out of GDP, was also less than previously estimated.

Consumer spending rose 2% in the quarter, following a downward revision of 0.4 percentage points, representing a decline from the 3.5% increase in the third quarter. According to the statement, the biggest contribution to the downward revision came from services, especially health expenditures.

On the inflation side, data for January, although mostly in line with forecasts, showed that price increases were well above the Federal Reserve’s desired level.

personal consumption expenditures price indexInflation, the Fed’s key inflation forecasting tool, gained a seasonally adjusted 0.3% for the month, pushing the annual rate to 2.8%. Economists surveyed by Dow Jones were expecting indicators of 0.3 percent and 2.9 percent, respectively.

Excluding variable food and energy costs, core PCE inflation rose 0.4% in January and 3.1% on a 12-month basis. Fed officials are focusing more closely on core data as a better indicator of long-term trends. The core reading was 0.1 point higher than in December.

A separate Commerce Department report showed: orders for long-lasting products transportation equipment, appliances and computers were flat in January, an improvement from December’s 0.9% decline but still well below forecasts for a 1.3% increase. Excluding transportation, orders increased by 0.4%.

“The massive downward revision in GDP is a gut check going into this energy crisis and increasing the risk of stagflation,” said David Russell, head of global market strategy at TradeStation. “Weak durable consumption data for January suggests the economy entered this crisis weaker than hoped. With PCE inflation still running well above the Fed’s target, this creates challenges for investors.”

Although the numbers are outdated, they offer a snapshot of inflation pressures and economic growth heading into the Supreme Court’s decision invalidating most of President Donald Trump’s tariffs imposed under the provisions of the International Emergency Economic Powers Act. Economists generally assumed that tariffs contributed about half a percentage point or slightly more to inflation trends.

The report also predates the attacks launched by the United States and Israel against Iran on February 28. Energy prices have soared in the almost two weeks since the conflict began, with international Brent crude hitting $100 a barrel on Thursday.

“Inflation data tells us that the inflation picture was not looking good even before the Middle East crisis,” said Sonu Varghese, chief macro strategist at Carson Group. “The already big headache for the Fed will turn into an even bigger headache, and the Fed will probably not cut rates in 2026 and may even start talking about a rate hike later this year.”

In January, personal income and spending increased by 0.4%, contrary to forecasts of 0.5% and 0.3%, respectively. The personal savings rate increased by half a percentage point to 4.5%.

In the GDP report, the demand indicator known as domestic private sales to private buyers increased by just 1.9% in the 4th quarter; It was revised with a decrease of half a point and a full point compared to the previous quarter.

Fed officials watch the PCE gauge closely because they view it as a broader measure of inflation than the consumer price index and use the private sales metric as an indicator of broader economic activity. Earlier this week, the Bureau of Labor Statistics reported in its February headline that the CPI rate was 2.4% and the core rate was 2.5%; that last one was the lowest reading since March 2021 but was still above the Fed’s 2% target.

The central bank will announce its next interest rate decision on Wednesday. Markets are predicting a nearly 100% probability that the rate-setting Federal Open Market Committee will remain on hold.