The US economy expanded at a slower-than-expected pace in the final months of 2025, government data released on Friday showed, highlighting potential vulnerabilities as the Middle East conflict continues to drive up energy prices.
The Commerce Department reported that US gross domestic product (GDP) grew at an annualized rate of 0.7% in the fourth quarter, sharply lower than the 1.4% growth previously estimated. The revision reflects downward adjustments to exports, consumer spending, government expenditure, and business investment, while imports fell less than initially calculated.
For the full year of 2025, GDP growth was 2.1%, slightly below the 2.2% previously reported. The tepid final quarter marks a significant slowdown from the third quarter, when the economy grew 4.4%.
Economists noted that the revised figures indicate the world’s largest economy entered 2026 on weaker footing than anticipated, just before the US and Israel launched strikes targeting Iran on February 28. The conflict has since disrupted global energy markets, pushing fuel prices higher and raising concerns about inflation.
President Donald Trump attributed the slowdown in part to a prolonged government shutdown late last year. The president has repeatedly called for lower interest rates to support the economy, but the Federal Reserve faces a delicate balance. While the central bank typically lowers rates to support employment, it raises them to curb inflation. Rising energy costs add to the pressure, complicating monetary policy decisions.
A separate report showed the Fed’s preferred inflation gauge came in slightly lower than expected in January at 2.8%, still well above the central bank’s longer-term target of 2%. Economists warn that higher energy prices, driven by instability in the Gulf and disruptions at the Strait of Hormuz, could further squeeze household budgets and reduce consumer spending, a key driver of US economic growth.
The labor market also shows signs of stress. February saw a loss of 92,000 jobs, while unemployment edged higher. These trends add to the challenges facing policymakers as they weigh the risks of slowing growth against the need to manage inflation.
Analysts said that while solid consumption and growth in artificial intelligence sectors helped sustain the economy in 2025, households are likely to face additional financial pressure in 2026 due to soaring energy costs. The combination of slower GDP growth, rising fuel prices, and a cooling labor market could shape both consumer behavior and monetary policy in the months ahead.
The report underscores the fragility of the US economy as external shocks, such as geopolitical tensions and volatile energy markets, intersect with domestic economic pressures, leaving policymakers with difficult trade-offs between growth and inflation.
