EconoFACTS

February 20, 2026 | 09:12

U.S. Economy Partially Shuts Down In Q4

Economist

Senior Economist and Director
Economics

Sal Guatieri is a Senior Economist and Director at BMO Capital Markets, with over two decades experience as a ma... (Read more)

Sal Guatieri

Senior Economist and Director
Economics

Sal Guatieri is a Senior Economist and Director at BMO Capital Markets, with over two decades experience as a ma... (Read more)

The longest-ever shutdown of parts of the federal government accounted for much of the economy's deceleration in Q4. Real GDP rose 1.4% annualized, more than a percentage point shy of consensus expectations and a big step back from the 4.4% rate in Q3. The BEA claims that, while it could not estimate the full effects of the six-week shutdown, the temporary suspension of federal employee pay subtracted about one percentage point from growth. A decline in federal government spending subtracted 1.2 ppts from annualized growth. This suggests some payback bounce for Q1. Other weak spots in Q4 included declines in both residential and nonresidential construction.

Despite sagging structures spending, business fixed investment continued to provide material support to the economy, largely due to the AI boom. Investment in information processing equipment and software added about 0.9 ppts to annualized growth. A small improvement in the U.S. trade deficit also added slightly.

Consumer spending growth slowed to 2.4% in Q4, with spending decelerating through the quarter to just a 0.1% advance in December (and 1.7% y/y). Real personal disposable income came to a screeching halt in the month and declined slightly in the quarter, reflecting weak job growth and slower wage growth. The saving rate slipped further to 3.6% in the month. Unless employment picks up or equity markets surge again, a waning wealth effect could weigh on personal spending going forward.

Piling on, inflation picked up late last year. Both overall and core PCE prices jumped 0.4% in December, lifting their yearly rates to 2.9% and 3.0%, respectively. The latter is the highest since last February. Tamer CPI inflation in January flags some relief, but the Fed's favorite measure is running uncomfortably high. Despite the weaker GDP print, look for the FOMC to hold to the sidelines in March.

Bottom Line: The U.S. economy isn't as weak as the Q4 headline figure suggests, nor was it as strong as Q3's 4.4% print suggested. Real final sales to private domestic purchasers (i.e., consumers and businesses) is still running at a solid rate of 2.4% a.r. in Q4 (and 2.5% y/y), though this is down from 2.9% in Q3. With personal tax cuts supporting consumer spending early this year, we still look for GDP growth of around 2 1/2% in 2026, assuming the AI boom doesn't fizzle out.

Table 1 - United States — Real GDP

(quarter/quarter % change : s.a.a.r.)

Source: BMO Economics, Haver Analytics

Table 2 - United States — Personal Income and Consumption

(month/month % change)

Source: BMO Economics, Haver Analytics