February 20, 2026
Fourth quarter GDP growth came in at 1.4%. Nobody expected that. The consensus was for growth in that quarter of about 3.0%. But the headline figure is grossly misleading because of the government shutdown. The Bureau of Economic Analysis estimates that the shutdown subtracted roughly 1.2% from GDP growth in that quarter which suggests that in the absence of the shutdown growth would have been about 2.6%. That is still a bit on the soft side relative to expectations but well within the range of normal forecast error.
The shutdown lasted 43 days from October 1 to November 12 which makes it the longest government shutdown in history. Some federal government workers were laid off. Others were without pay for that period of time. Some government agencies like Medicare, Medicaid, the Department of Defense, and the TSA continued to operate while others were forced to temporarily shut their doors. All of that presumably reduced fourth quarter GDP growth by 1.2%, but once government operations resume in the first quarter GDP growth should be boosted by a roughly similar amount.
Beyond the government sector the report was fairly normal. Consumer spending climbed by 2.4% which was roughly in line with other recent quarters. Despite worries about the economy going forward, the fear of a pickup in inflation as the impact of tariffs spreads, and anemic jobs gains, the consumer continues to spend as stock market gains allow them to supplement their income and maintain their lifestyle.
Investment spending gained 3.7% in the fourth quarter as AI spending led the way. Spending on artificial intelligence is spreading rapidly and in its infancy of being adopted. As a result, AI should provide a boost to spending throughout the year.
Residential investment fell 1.5% in the fourth quarter as home sales continued to slump. However, this is probably the bottom for housing. Gains in income, slightly lower mortgage rates, and a leveling off of prices has boosted affordability which should provide a lift to housing in the months ahead. We expect residential spending to increase by about 5.0% this year.
The monthly trade deficit has bounced around sharply in recent months but, on balance, real net exports changed very little in the fourth quarter. Trump’s goal of imposing tariffs was to shrink the trade deficit. He wanted to entice current exporters of goods to the United States to build plants here and hire American workers to staff them. But there is little evidence of that happening thus far.
Federal government spending plunged by 16.6% in the fourth quarter as the shutdown took its toll. However, spending will rebound in the early part of this year and allow GDP growth to return to normal.
While the shutdown whacked growth in the fourth quarter, it should be treated as a one-off event that had a temporary impact on growth. For what it is worth we expect GDP growth in the first quarter to rebound to 3.3% and growth for the year to be 3.0%
We continue to expect the consumer to hang in there and spend at a moderate pace this year. Investment spending will be stimulated by spending on technology, AI in particular. The housing market should get a boost as home prices level off, mortgage rates decline slightly and affordability increases. And rapid growth in productivity will produce impressive looking GDP growth despite little job creation.
We continue to expect the inflation rate to slow somewhat this year from 2.6% currently to 2.1% by yearend.This combo may allow the Fed to ease once during the year which would lower the funds rate to 3.25%. But even with a new Fed Chair in midyear the Fed will be unable to lower the funds rate to the 1.0% mark that Trump thinks is appropriate.
Stephen Slifer
NumberNomics
Charleston
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