The economy slowed in the last 3 months of the year — but was still solid in 2025

WASHINGTON — The U.S. economy demonstrated remarkable resilience in 2025, capping the year with steady growth even as momentum cooled in the final quarter. Propelled by the twin engines of robust consumer spending and a surge in business investment in artificial intelligence, the economy successfully navigated headwinds from a stalling labor market and a sluggish housing sector, according to a comprehensive report released Friday by the Commerce Department.

The data paints a picture of an economy in transition, one that defied widespread recession forecasts but now faces a more complex and uncertain path forward into 2026.

The Final Tally for 2025

The nation's gross domestic product (GDP)—the broadest measure of all goods and services produced—grew at an annualized rate of 1.4% in the fourth quarter, covering October, November, and December. This marks a significant deceleration from the blistering 4.4% pace recorded in the third quarter.

For the full year, the economy expanded by a solid 2.2%. This figure is only a slight moderation from the 2.4% growth achieved in 2024, underscoring the economy's underlying strength throughout the year.

• Quarterly Slowdown: The 1.4% Q4 growth rate, while positive, indicates a downshift as the year concluded. This was expected by many economists as the effects of higher interest rates and a cooling job market began to take hold.
• Annual Resilience: Achieving 2.2% growth for the entire year is a notable success, showcasing the economy's ability to absorb shocks and continue expanding. Both the quarterly and annual figures are adjusted for inflation.

Consumers Continue to Power the Economy

The American consumer remained the primary driver of economic activity, a long-standing pillar of U.S. growth. Personal spending, which accounts for roughly two-thirds of the economy, rose at a healthy 2.4% annualized rate in the fourth quarter.

"The consumer drives the economic train," affirmed Mark Zandi, chief economist at Moody's Analytics.

This spending, however, reveals a growing divergence within the population.

• The Wealth Effect: Wealthier households, buoyed by appreciating home values and strong stock market performance, continued to spend freely. "The well-to-do, they're doing great and they're out spending," Zandi noted.
• Middle and Lower-Income Strain: In contrast, households in the bottom and middle of the income distribution have become more cautious. "Folks in the bottom and middle of the income distribution, not so much," Zandi added. Many are drawing down savings or taking on more debt to manage expenses.
• Rising Debt: This strain is reflected in national credit data. The credit rating agency TransUnion reported that total credit card balances swelled to $1.15 trillion in the fourth quarter, an increase of $39 billion from the prior year, signaling that some spending is being financed by borrowing.

A Cooling Labor Market Poses a Risk

The sustained economic growth occurred despite a dramatic slowdown in the U.S. labor market. The sharp decline in job creation presents a significant risk to the economic outlook for 2026.

• Hiring Slowdown: U.S. employers added a mere 181,000 jobs over the entirety of 2025. This is a stark contrast to the more than 1.4 million new jobs created in 2024.
• Expert Warning: "That just can't hold," Zandi cautioned. "If that continues, I think we'll start to see unemployment tick higher, consumers become more cautious, and the economy will struggle. So hopefully we start to see some job growth here in the not too distant future."
• A Glimmer of Hope: Hiring showed signs of life in January 2026, with the economy adding 130,000 jobs. However, a large portion of these gains were concentrated in health care, an industry known for its stable hiring patterns regardless of broader economic conditions.

The AI Boom Provides a Powerful Boost

A bright spot in the report was the significant contribution from business investment, particularly in the technology sector. A frenzy of spending on infrastructure to power the artificial intelligence revolution helped offset weakness elsewhere.

Tech companies invested enormous sums in the fourth quarter on the essential hardware for AI, including advanced data centers and specialized semiconductors.

• A Shining Star: Zandi described the AI investment trend as "a bright, shining star that should continue to shine brightly in 2026," suggesting it is a durable, long-term driver of growth.
• Broader Investment Potential: There are early indications this investment wave could expand beyond AI. In a research note, Wells Fargo economists Tim Quinlan and Shannon Grein wrote, "While the A.I. investment boom is expected to continue, recent data suggests early signs of a broader pickup."
• Policy Incentives: This potential pickup is supported by federal policy. The GOP tax bill passed last summer allows companies to immediately deduct the full cost of equipment investments, a powerful incentive designed to spur capital spending across various industries.

Other Economic Crosscurrents

Several other factors created volatility in the GDP figures throughout 2025, though their net effect on the full-year number was more muted.

• Housing Headwinds: Lackluster residential investment was a consistent drag on the economy all year. "One dark spot in the economy that continues to be a problem in 2026 will be housing," Zandi said, citing a severe affordability crisis. Despite mortgage rates falling from nearly 7% to just over 6%, high home prices continue to sideline many potential buyers, keeping sales of new and existing homes sluggish.
• Trade Fluctuations: Wild swings in international trade distorted quarterly GDP figures. Imports, which are subtracted from GDP, soared early in 2025 as businesses stockpiled goods ahead of President Trump's tariffs. This made early-year growth appear weaker. Once tariffs were implemented, imports fell, artificially boosting GDP later in the year. For all of 2025, the U.S. trade deficit was largely unchanged from 2024.
• Government Spending: A temporary decline in government spending, partly due to the six-week federal shutdown, subtracted from fourth-quarter growth. Most of this impact is expected to be reversed in the first quarter of 2026 as federal activity and back pay are processed.

The Bottom Line: What to Watch in 2026

The U.S. economy enters 2026 at a crossroads. The resilience of 2025 has given way to a more precarious balance. The key question is whether the powerful momentum from consumer spending and AI investment can continue to outrun the drag from a weak labor market and an unaffordable housing sector.

Policymakers at the Federal Reserve will be watching these conflicting signals closely as they chart the course for interest rates. For now, the economy remains on solid ground, but the path forward will require navigating significant and growing challenges.