U.S. Growth Slows After Shutdown Shock, but Private Demand and AI Investment Show Resilience

The US economy slowed sharply at the end of last year, with growth dropping to 1.4% (QoQ Annualized) in the fourth quarter, a steep decline from 4.4% in the third quarter, as a prolonged government shutdown curbed federal spending and weighed on activity.

While consumer spending remained resilient for much of the year, the weight of a prolonged government shutdown proved too heavy to ignore. The sudden withdrawal of federal expenditures not only dragged down the headline numbers but also dampened consumption spending and to a lesser extent business investment.

1- Government Shutdown Distortion Masks Underlying Economic Resilience

Despite the headline slowdown, underlying demand remained comparatively stable. Final sales to private domestic purchasers — a key gauge of private-sector momentum — rose 2.4%, close to expectations. Consumer spending moderated to 2.4% from 3.5%, driven by weakness in goods purchases.

Durable goods fell 0.9%, with auto sales providing the largest drag. The reduction or removal of EV incentives from Oct. 1st weakened consumer demand (after frontrunning effect in Q3), while slower adoption rates cooled overall market momentum. Nondurable goods slowed sharply, while food services and accommodation spending softened — likely reflecting disruptions linked to the shutdown.

Services spending remained resilient, rising 3.4%, suggesting households continued spending on experiences and essential services even as goods demand cooled.

2- AI Investment Boom Continues to Support Business Spending

Business investment continued to find support from technology spending, particularly in artificial intelligence infrastructure. Equipment investment grew 3.2%, while spending on intellectual property accelerated to 7.4%. Information-processing equipment surged, driven by purchases of computers and communications hardware. Data center construction also strengthened.

In the details, spending on information-processing equipment surged to 36.1% (up from 8.8% previously) leading to a positive contribution of 0.65ppt. Within structures, investment in data centers accelerated to 27.3%, from 26.2% previously. In the meantime, spending on software also surged to +7.1% (v +3.6% prior) leading to a positive contribution of 0.17ppt.

Source: BEA

Over the past four quarters, on a moving-average basis, AI-related investment has made a growing contribution to GDP (see chart above). This momentum is expected to accelerate in 2026, with capital expenditures by the largest technology companies projected to approach $700 billion, according to recent estimates.

3- Housing Weakness and Federal Spending Cuts Drag on Growth

Residential investment remained weak, falling 1.5%, extending the housing sector’s downturn amid affordability pressures. The sector contributed negatively to GDP for the fourth consecutive quarters. This persistent weakness reinforces the likelihood of a strategic shift: if the President doesn’t see a bump in approval ratings following the February 24 State of the Union, we should anticipate an aggressive pivot toward ‘Main Street’ policies and new affordability initiatives as the midterm elections approach.

Looking at government spending, federal outlays plunged 16.6%, slicing 1.15 percentage points off headline growth, driven by lower nominal spending and surge in inflation that is artifact of govt employees being paid but not producing output. In the details, nondefense spending fell 24.1%, while defense expenditures declined 10.8%, highlighting how the shutdown disrupted public-sector activity and temporarily distorted the growth picture.

The six-week shutdown was the primary driver of the slowdown, with analysts estimating it shaved more than one percentage point off GDP. Note that forty minutes before the federal government revealed that economic growth slowed sharply in the last quarter, President Donald Trump dropped a hint that the incoming data would be weaker. “The Democrat Shutdown cost the U.S.A. at least two points in GDP. That’s why they are doing it, in mini form, again,” Trump wrote in a Truth Social post at 7:50 a.m. ET.

Source: Truth

4- 2026 Outlook: Rebound Expected as Federal Spending and AI Investment Accelerate

In this context, I anticipate a rebound in federal spending in the first quarter as government operations normalize. Part of business equipment investment and consumption affected by the government should also recover sharply while fiscal stimulus tied to the One Big Beautiful Bill Act is expected to support economic activity.

Meanwhile, AI investments and rising productivity are set to drive further momentum. Additionally, we expect a mechanical rebound in auto sales during Q1, following the pullback seen in Q4.

*Bottom line: The fourth-quarter slowdown reflects a temporary fiscal shock rather than a structural deterioration. With federal spending set to rebound and private-sector investment accelerating, the economy appears poised to regain momentum in the months ahead.