WASHINGTON, Feb 20 (Reuters) – U.S. economic growth likely slowed to a still-solid pace in the fourth quarter because of disruptions from last year’s government shutdown and a moderation in consumer spending, though tax cuts and investment in artificial intelligence were expected to drive activity this year.
The anticipated slowdown in gross domestic product would follow back-to-back quarters of robust growth. The Commerce Department will publish on Friday its advance estimate of fourth-quarter GDP, which was delayed by the record 43-day government shutdown.
The report is expected to highlight a jobless economic expansion as well as a “K-shaped” economy, where upper-income households are doing well while lower-income consumers are struggling amid high inflation from import tariffs and stalling wage growth. Those conditions have created what economists and President Donald Trump’s opponents call an affordability crisis.
“We’ll end the year still on a solid note in terms of growth, but it doesn’t really translate to feel as good as it looks on paper to most Americans,” said Diane Swonk, chief economist at consulting firm KPMG.
GDP LIKELY INCREASED 3.0%: SURVEY
GDP probably increased at a 3.0% annualized rate last quarter after accelerating at a 4.4% pace in the July-September quarter, a Reuters survey of economists predicted. The survey was, however, completed before data on Thursday showing the trade deficit widening to a five-month high in December.
The second straight monthly deterioration in the trade deficit led the Atlanta Federal Reserve to cut its GDP estimate to a 3.0% rate from a 3.6% pace.
The nonpartisan Congressional Budget Office estimated the government shutdown would subtract 1.5 percentage points from fourth-quarter GDP through fewer services provided by federal workers, lower federal spending on goods and services and a temporary reduction in Supplemental Nutrition Assistance Program benefits.
The CBO estimated most of the decline in GDP would eventually be recovered, though between $7 billion and $14 billion would not. Economists estimated the economy grew 2.2% in 2025 after expanding 2.8% in 2024. Only 181,000 jobs were added last year, the fewest outside the pandemic since the 2009 Great Recession, and down from 1.459 million in 2024.
“You have a confluence of shocks affecting the U.S. economy,” said Gregory Daco, chief economist at EY-Parthenon. “You have on the one hand the drag from higher prices, tariffs, trade restrictions and reduced immigration, but also the boost from AI investment and the continued strong momentum in terms of stock prices supporting ongoing spending by the more affluent consumers.”
GROWTH IN CONSUMER SPENDING LIKELY SLOWED
Growth in consumer spending is expected to have slowed from the third quarter’s brisk 3.5% pace. Economists say spending has largely been driven by higher-income households and has been at the expense of saving as inflation eroded buying power.
“Getting richer is one thing, but most households rely on incomes to pay bills, and real disposable income pretty much stalled in the quarter,” said Sal Guatieri, a senior economist at BMO Capital Markets.
Consumer spending could get a tailwind from what economists anticipate will be larger tax refunds this year because of tax cuts. A solid pace of business investment is expected, mostly related to AI. The jump in imports in December was partly driven by capital goods, mostly computer accessories and telecommunications equipment amid a data center construction boom to power AI.
That should offset any drag on GDP growth from trade.
Economists estimated AI, including data centers, semiconductors, software and research and development, accounted for a third of GDP growth in the first three quarters of 2025, blunting the hit from tariffs and reduced immigration.
“It’s a significant contribution from a sector that traditionally has represented a small share of the economy,” said EY-Parthenon’s Daco. “It’s also been a key source of volatility in the trade data, because a lot of what we are building here and creating is imported.”
Economists estimated that trade made little or no contribution to GDP after helping to boost growth for two straight quarters. Inventories were another wild card, having subtracted from GDP for two consecutive quarters.
Residential investment is forecast to have contracted for the fourth quarter in a row as builders and prospective homebuyers struggled with higher borrowing costs.
The stale report will probably have no impact on monetary policy. But Federal Reserve officials are likely to keep an eye on December’s Personal Consumption Expenditures inflation data, due to be released at the same time as the GDP report.
Economists polled by Reuters forecast PCE inflation, excluding the volatile food and energy components, rising 0.3%. Core PCE inflation rose 0.2% in November from the previous month. Core PCE inflation was projected to have increased 2.9% year-on-year after rising 2.8% in November. The U.S. central bank has a 2% inflation target.
“The year-on-year growth rate of the core has shown essentially no progress since mid-2024,” said Lou Crandall, chief economist at Wrightson ICAP. “Many Fed officials anticipate at least some improvement in the coming months, but they will want to see that show up in the actual numbers.”
(Editing by Rod Nickel)
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