Shutdown Slows GDP Growth, but Recovery Expected in 2026

Shutdown Slows GDP Growth, but Recovery Expected in 2026

U.S. economic growth is poised for a rebound in 2026 after underperforming expectations in the final quarter of 2025, according to forecasts from Oxford Economics.

The Commerce Department reported that GDP grew at an annual rate of just 1.4% in Q4 2025, a sharp decline from the previous quarter’s growth of 4.4%. Analysts had anticipated a growth rate of 2.5%, making the outcome well below expectations. Much of the slowdown can be attributed to the 43-day federal government shutdown, which dampened economic activity. As a result, full-year GDP growth for 2025 settled at 2.2%, down from 2.8% in 2024.

Oxford Economics Chief U.S. Economist Michael Pearce noted that the shutdown alone likely reduced fourth-quarter growth by more than 1 percentage point. The economy also faced additional headwinds from the expiration of tax credits, which contributed to a decline in electric vehicle sales.

Despite the underwhelming end to 2025, Pearce is optimistic about the year ahead. Several factors are expected to drive a recovery, including declining inflation, stabilizing employment, increased investment in artificial intelligence, and tax cuts set to take effect in 2026.

“The winter weather likely held back spending in January, but we anticipate a strong rebound in the coming months, especially with a larger-than-usual tax refund season,” Pearce said. He also pointed to rising business investment in equipment and the expectation that consumer inflation will drop to 2.3% by the end of 2026. While the Federal Reserve is expected to hold interest rates steady at least through June, these positive trends signal a potential return to stronger growth.