The Q4 Report Card Is In
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The Q4 Report Card Is In
"GDP measures everything except that which makes life worthwhile." — Robert F. Kennedy, 1968. Last Friday's GDP report told two stories at once. Here are five numbers that explain why.
Q4 2025 GDP Growth — A Misleading Headline
The U.S. economy grew at an annualized rate of just 1.4% in the final quarter of 2025, a jarring drop from the 4.4% pace in Q3 and well below the 2.5% economists had expected. But the number is deeply misleading. A six-week federal government shutdown that began October 1st knocked roughly a full percentage point off the headline figure. Strip that out, and the private economy — consumers and businesses — grew at a respectable 2.4% pace. The report was itself delayed by a second, shorter shutdown in early February.
Source: Bureau of Economic Analysis — GDP Advance Estimate, Q4 2025
Federal Spending Collapsed in Q4
Federal government spending fell at a 16.6% annualized rate in the fourth quarter — the steepest decline in four years — shaving 1.15 percentage points off GDP growth by itself. The shutdown accounted for part of that, but not all: roughly two-thirds of federal employees continued working through the lapse. The rest of the decline reflected broader federal workforce reductions that began in October. State and local spending, by contrast, continued growing at a steady 2.4% pace.
Source: Bureau of Economic Analysis — GDP Advance Estimate, Q4 2025
Americans' Savings Rate Keeps Falling
The personal savings rate dropped to 3.6% of disposable income in December — its lowest since October 2022 and down steadily from 4.9% last May. That means for every dollar of after-tax income, Americans are setting aside less than four cents. EY-Parthenon's chief economist noted that consumer spending is increasingly being "propelled by affluent households" while middle- and lower-income families rely on savings drawdowns and borrowing to keep up. The long-term average is closer to 7–8%.
Source: Bureau of Economic Analysis — Personal Income and Outlays, December 2025
PCE Inflation — Moving the Wrong Direction
The Fed's preferred inflation gauge, the Personal Consumption Expenditures price index, rose to 2.9% year-over-year in December — its highest reading since March 2024 and moving further from the Fed's 2% target, not closer. Core PCE, which strips out food and energy, hit 3.0%. The uptick was driven partly by goods prices rising under the weight of tariffs on imports. With inflation re-accelerating while growth slows, the Fed faces an uncomfortable balancing act heading into spring.
Source: Bureau of Economic Analysis — PCE Price Index, December 2025
What the Government Paid in Interest Last Year
The federal government spent $970 billion on net interest payments in fiscal year 2025 — a record 3.2% of GDP, according to the CBO's latest projections released this month. That's more than the government spent on defense, and it's projected to more than double to $2.1 trillion by 2036 as debt grows and rates stay elevated. Every dollar spent servicing debt is a dollar unavailable for anything else. The CBO projects total federal debt will hit a record 120% of GDP within a decade.
Source: Congressional Budget Office — February 2026 Budget and Economic Outlook