Economic expansion continued, driven primarily by consumer spending and business investment in artificial intelligence, but was tempered by tariffs, a six-week federal government shutdown, and rising global energy costs.
The U.S. economy in 2025 experienced a deceleration in growth and a significant slowdown in job creation, alongside persistent inflation and heightened geopolitical uncertainty. Consumer confidence fell to historically low levels, while producer prices rose faster than anticipated, signaling ongoing price pressures.
Economic Growth
Gross Domestic Product (GDP)
The U.S. economy expanded at an annualized rate of 0.7% in the fourth quarter of 2025, according to a revised Commerce Department report. This marked a significant deceleration from the 4.4% growth rate in the third quarter and 3.8% in the second quarter.
For the entirety of 2025, GDP grew by 2.1% , down from 2.8% in 2024 and 2.9% in 2023. The slowdown was partly attributed to a 16.7% decrease in federal government spending—driven by a 43-day shutdown—which reduced growth by 1.16 percentage points.
Consumer Spending
Consumer spending, which accounts for roughly two-thirds of U.S. economic activity, rose at an annual rate of 2.4% in Q4, down from 3.5% in Q3. Despite negative sentiment surveys, spending remained robust throughout 2025, driven primarily by higher-income consumers who benefited from rising home values and stock portfolios. Businesses serving lower-income consumers reported increased caution among these shoppers.
TransUnion data indicated that credit card balances rose to $1.15 trillion in Q4, an increase of $39 billion from the previous year.
Retail sales, adjusted for seasonality but not inflation, increased 0.6% in February, beating economists' projections of a 0.4% rise, following three consecutive months of declines.
Business Investment
Business investment (excluding housing) increased 2.2% in Q4, a decline from 3.2% in Q3. Significant business investments were made in artificial intelligence, with technology companies spending heavily on data centers and infrastructure. Economists projected AI investment would remain a strong factor in 2026. The 2025 GOP tax bill aimed to encourage further investment through immediate tax deductions.
Trade and Housing
Fluctuations in international trade impacted quarterly GDP figures. Imports surged in early 2025 ahead of tariff implementation, then decreased. Exports fell at a 3.3% annual rate in Q4, a larger drop than initially estimated. The U.S. trade deficit for 2025 remained largely consistent with the prior year.
Residential investment consistently acted as a drag on the economy. Housing affordability was identified as a persistent challenge for 2026, driven by elevated home prices and mortgage rates. While mortgage rates decreased to just over 6% from nearly 7% a year prior, sales of existing homes and new construction remained subdued.
Employment
Job Growth
Hiring activity slowed markedly during 2025. The economy recorded job losses in June, August, and October. For the year, job additions averaged fewer than 10,000 per month—the weakest hiring period outside recession years since 2002. The economy added 181,000 jobs in total in 2025, compared to over 1.4 million in 2024.
January 2026 saw a pickup, with 130,000 jobs added, largely within the healthcare sector.
Unemployment Rate
The unemployment rate increased from 4.0% in January 2025 to 4.6% in November 2025—a four-year high. It stood at 4.4% in December 2025 and 4.3% in January 2026.
Contributing Factors
Key factors behind the slowdown included uncertainty related to tariffs and the increasing adoption of artificial intelligence within businesses. Federal Reserve Governor Christopher Waller noted that business executives frequently cited AI as a reason for their reluctance to expand workforces.
Signs of improvement emerged late in 2025. Excluding government jobs, businesses added an average of 75,000 jobs per month between September and November, up from 13,000 per month during June–August.
Hiring was largely concentrated in healthcare, restaurants and hotels, and government (excluding October). Most other large private industries experienced job reductions. Layoffs remained at low levels throughout the year.
Job Market Perceptions
A Conference Board survey revealed that over 55% of respondents found it difficult to secure a job—the highest proportion since the pandemic. Respondents also expressed pessimism about the labor market's trajectory. However, new applications for unemployment benefits remained at historically low levels.
Inflation and Prices
Consumer Price Index (CPI)
Inflation showed limited improvement in 2025 after significant declines in 2023 and 2024. The Federal Reserve’s preferred measure of annual inflation rose to 2.8% in September, up from 2.7% in December 2024.
The Consumer Price Index (CPI) increased by 0.9% in March 2026—the steepest monthly rise since 2022—bringing the annual rate to 3.3% , the highest in nearly two years. A cooling of inflation in November 2025 was influenced by the government shutdown and subsequent holiday discounts.
Producer Price Index (PPI)
The Producer Price Index (PPI), measuring the average change in prices producers receive, rose 0.5% in January 2026 (accelerating from December's 0.4%), with an annual rate of 2.9% . Core PPI (excluding food and energy) increased 0.8% in January, reaching an annual rate of 3.6% —the highest in ten months.
Prices for finished consumer goods (excluding food and energy) rose to an annual rate of 3.4% , the highest year-over-year rate for that category in over two years.
Gas and food prices decreased in January 2026, but were offset by a 2.5% increase in "trade services" (reflecting profit margins for wholesalers and retailers).
Role of Tariffs
Tariffs implemented by President Donald Trump were linked to higher prices for specific imports, such as beef, coffee, and tomatoes. Economists noted that tariffs appeared to be influencing prices along the supply chain, suggesting the full impact on consumer prices may not yet be evident.
Businesses largely absorbed higher tariff costs without passing them on to consumers, which helped control inflation—though this could change depending on a Supreme Court ruling on tariff legality. Factors delaying tariff-driven price hikes included businesses stocking up on pre-tariffed goods and the varied implementation of tariffs.
Inflation Expectations
Year-ahead inflation expectations rose to 4.7% in April 2026, up from 3.8% in March—the largest monthly increase since April 2025. Long-term expectations (five to ten years) increased to 3.5% in April 2026. The Federal Reserve targets 2% annual inflation.
Consumer Sentiment
Consumer sentiment declined to historically low levels. The University of Michigan's Index of Consumer Sentiment registered 49.8 in April 2026—the lowest on record since the survey began in 1952. The index had reached 53.3 in March, followed by a preliminary reading of 47.6 in early April.
The Conference Board's Consumer Confidence Index decreased by 9.7 points to 84.5 in January 2026—a level not seen since 2014 and lower than pandemic recession lows in 2020. This was below economists' projections of 91.1.
Contributing Factors
Factors cited for the decline included elevated concerns about prices and inflation (oil, gas, food, groceries), geopolitical tensions, tariffs, trade policies, the labor market, and health/insurance costs. Mentions of war increased in consumer surveys.
Sentiment declined across all age, income, education, and political party groups. Consumers with middle and higher incomes and stock wealth showed particularly significant drops, affected by both escalating gas prices and financial market volatility.
Ceasefire Impact
The index recovered modestly in April 2026 after a ceasefire announcement and a slight softening of gas prices. Joanne Hsu, Director of the University of Michigan's Surveys of Consumers, noted that "the ceasefire in the Middle East provided some relief regarding gas and other prices," but that military or diplomatic developments not lifting supply constraints or lowering energy prices were unlikely to boost consumers.
Geopolitical Context
The conflict in the Middle East contributed to higher global energy prices, leading to volatility in major U.S. stock indexes. A temporary ceasefire with Iran was announced by President Donald Trump.
Gas prices across America surged since the onset of the conflict. WTI, the U.S. benchmark, settled at $102.88—its highest closing level since July 2022. The average price for a gallon of gasoline surpassed $4 for the first time since 2022. Prices for plastic and fertilizer also increased.
The conflict carries risks of increased inflation and weakened economic growth, with the potential impact growing with its duration. If the conflict extends for months, the economic outlook could worsen, potentially triggering a downward spiral involving falling stock values, reduced consumer spending, and a recession.