US economic growth posted a sizable downside miss in Friday’s fourth-quarter report, but early Q1 nowcasts point to a rebound.
One theory for why output fell short of expectations in Q4 centers on the government shutdown in October. According to the Bureau of Economic Analysis, government spending subtracted nearly a full percentage point from headline GDP’s 1.4% annualized increase, marking a sharp downshift from Q3’s robust 4.4% increase.
A back-of-the-envelope estimate suggests that removing the 0.9 percentage point reduction in government spending (the deepest quarterly slide in six years) would have raised growth to the low 2%-plus range, just below the consensus forecast of 2.5%.
“The federal government shutdown clearly sent the economy careening off its strong growth path in the fourth quarter which is a one-off that won’t be repeated in early 2026,” said Chris Rupkey, chief economist at Fwdbonds.
Several nowcasts for Q1 agree, including the Atlanta Fed’s model, estimating a 3.1% increase for GDP in the first three months of 2026 (as of Feb. 20). The New York Fed’s Q1 nowcast also reflects a recovery, albeit a softer one at an estimated rise of roughly 2.4% (Feb. 20).
Economic activity tracked by the Dallas Fed’s Weekly Economic Index indicates that the growth trend in recent history remains intact midway through Q1. The WEI rose to 2.58 through Feb. 14, the highest since August – a reading that’s above the pace of year-over-year GDP growth in 2025.
The key takeaway: The slowdown in Q4 growth doesn’t appear to be a warning flag for the economy. Although economic activity has probably slowed relative to the strong GDP increases in last year’s second half, the latest numbers point to moderate growth in the near term.
As usual these days, there could be several jokers in the deck that shock the otherwise upbeat outlook. Among the risk factors lurking at the moment: macro uncertainty following Friday’s ruling by the Supreme Court that President Trump’s tariffs are illegal and the threat of a US strike on Iran. Absent serious, sustained blowback from those events, however, the outlook still points to moderate growth for the near term.