Record Government Shutdown Obscures Underlying Economic Resilience

2026-02-21 economy

Washington, Saturday, 21 February 2026.
While the Commerce Department’s latest report shows U.S. GDP growth decelerated to a 1.4% annual rate in the fourth quarter of 2025, the headline figure is deceptive. This slowdown from the third quarter’s robust 4.4% expansion was primarily driven by a singular, temporary distortion: the historic 43-day government shutdown. Analysts estimate this political gridlock subtracted nearly a full percentage point from the final tally, masking an otherwise resilient economic foundation. Crucially, the private sector remains solid; consumer spending—the engine of the U.S. economy—rose by 2.4%, and business investment continued to expand, fueled by heavy spending on artificial intelligence. Rather than signaling a collapse in demand, the data suggests a pause induced by technical factors. With the shutdown resolved and tax refund season approaching, economists forecast a sharp rebound in early 2026, indicating the underlying momentum remains intact despite the optical slump.

Anatomy of a Distortion

The divergence between the 1.4% annualized growth rate reported by the Commerce Department and the expectations of economists—some of whom forecast up to 3.0%—is largely mathematical rather than structural [1][3]. The primary culprit was a precipitous plunge in federal government spending, which contracted at an annualized rate of 16.6% in the fourth quarter, marking the steepest decline recorded since the third quarter of 1972 [3]. This contraction alone shaved approximately 1.15 percentage points off the headline GDP number [3]. Without this “self-inflicted drag” from the 43-day shutdown that spanned October and November 2025, the economy would have likely tracked significantly closer to its potential, confirming that the slowdown was an event-driven anomaly rather than a cyclical downturn [1][6].

The Consumer Pivot and Inflationary Pressures

Beneath the volatile top-line figures, the private sector demonstrated stability, largely due to the American consumer. While overall spending growth cooled to 2.4% from the previous quarter’s 2.9%, the composition of that spending reveals a distinct pivot [1]. Service-sector spending was the primary driver, contributing 1.6 percentage points to growth, whereas spending on durable goods actually declined by 0.9% [2]. This resilience is critical, as consumer spending accounts for approximately two-thirds of the nation’s economic activity [1].

Outlook for 2026

Looking ahead, the economic landscape appears poised for a rebound as temporary hurdles clear. On February 19, 2026, the U.S. Supreme Court struck down the tariffs imposed by the previous administration, removing a significant layer of trade uncertainty [3]. Combined with a normalization of government operations and a robust tax refund season, Capital Economics projects growth will accelerate to a 3% annual rate in the first quarter of 2026 [1]. While the economy has slowed, it rests on what economists describe as three “A” pillars: affluent consumers, AI-driven investment, and asset price appreciation, suggesting the expansion has room to run despite the deceptive fourth-quarter print [6].

Sources

Economic Growth Gross Domestic Product