US Growth Stalls as Shutdown, Inflation Trap the Fed

The annual growth rate for the fourth quarter was revised down today to just 0.7%. This is a significant retreat from the initial 1.4% estimate and a massive deceleration from the 4.4% surge seen in the third quarter. While the headline figure is jarring, it carries the heavy watermark of the extended government shutdown that paralysed federal operations late last year. Government consumption expenditures tumbled by 1.03%, acting as a primary anchor on an economy that was otherwise being kept afloat by a resilient, if tired, consumer.

The durable consumer vs the federal void

Despite the federal vacuum, personal consumption expenditures managed a 1.3% increase, driven largely by service spending. Business investment also provided a modest 0.57% lift to the GDP, with a notable concentration in computers and peripheral equipment as firms continued to chase artificial intelligence infrastructure gains despite the broader macro gloom.

For the full year, the US economy expanded by 2.1%. While positive, it marks a clear cooling from the 2.8% growth recorded in 2024. The narrative for 2025 was one of a "two-speed" economy: robust private demand and investment fighting against the twin headwinds of political gridlock and high borrowing costs.

Inflation's stubborn floor

If the growth data suggests the economy is cooling, the inflation data suggests it hasn't cooled enough for the Federal Reserve’s liking. The Personal Consumption Expenditure (PCE) Index, the Fed’s preferred thermometer, rose at an annual rate of 2.8% in January. While this was a slight dip from December’s 2.9%, it remains stubbornly above the 2% target.

The real concern for policymakers lies in Core PCE, which strips out volatile food and energy costs. That figure climbed to 3.1%, driven by the rising cost of "essentials" that consumers cannot easily avoid: healthcare, financial services and insurance.

Crucially, these January numbers are a look in the rearview mirror. They do not yet reflect the price of fuel at the pump following the recent escalation of military conflict in the Middle East. With energy costs surging in February and March, the Fed is facing a "lag effect" that could see headline inflation bounce back just as growth begins to wobble.

JOLTS and the labour question

The final piece of the puzzle arrived today with the latest Job Openings and Labor Turnover Survey (JOLTS) data. The US Bureau of Labor Statistics reported 6.9mn job openings in January, up from a revised 6.5mn in the month before and significantly above economist expectations of 6.7mn.

The increase in openings was highly concentrated, led by finance and insurance (+184,000) and trade, transportation and utilities (+155,000). However, "openings" are not "hires." Actual hiring decreased the most in trade, transportation and utilities (-119,000) and healthcare (-51,000). Total separations remained flat at 5.1mn, suggesting an increasingly stagnant labour market: firms are hunting for specific talent but are hesitant to pull the trigger on new headcount, while employees are largely staying put.

The Fed's impossible balance

These data points leave the Federal Open Market Committee (FOMC) in a familiar but increasingly uncomfortable bind. Policymakers are weighing the risks of a "softening" jobs market and anaemic 0.7% growth against the reality of 3.1% core inflation and a looming energy shock.

The "architects" of the current inflation and lagging labour market will continue to press for further rate cuts. The FOMC policymakers will be looking for signs that the US economy can continue to sail through tariffs, economic policy uncertainty as it faces new energy price shock headwinds.