The U.S. is slowing, but inflation won’t let up. GDP, PMI and tariffs in one “difficult” mix

• US GDP in Q4 2025 fell to 1.4% (annualized) from 4.4% in Q3, dragged by weaker goods consumption, a drop in exports, and a steep fall in government spending (shutdown effects), while business investment—especially IP and equipment—helped cushion the slowdown.
• S&P Global Composite PMI at 52.3still indicates expansion, but at the slowest pace since April 2025. New orders and export demand weakened, hiring was minimal, and input costs and selling prices accelerated, complicating the Fed’s policy path.
• Equities rallied after the Supreme Court blocked “emergency” tariffs, but efforts to revive tariffs via other channels keep trade risk alive; alongside sticky inflation (core PCE: 3% y/y), this supports a data-dependent Fed, with 10-year yields at 4.08% and a slightly softer dollar.

A sharp GDP slowdown: 1.4% instead of the expected 3%

The end of 2025 proved clearly weaker for the U.S. economy than anticipated. Real GDP growth in Q4 fell to 1.4% at an annual rate, down from 4.4% in Q3. The deceleration is large enough that it’s hard to dismiss as mere “statistical noise,” especially given that markets had been looking for a result closer to 3%.

What weakened growth in Q4 2025?

Consumer spending growth slowed to 2.4% from 3.5% in Q3. The weakness was most visible in goods purchases, which edged down slightly (-0.1%). Services—traditionally more resilient to the business cycle—grew more strongly (+3.4%), but not enough to offset softness in goods. Exports fell by 0.9% after an impressive surge in Q3 (+9.6%). Imports also declined (-1.3%), but the change was less dynamic than earlier, meaning foreign trade no longer provided the same support. The takeaway is straightforward: external demand stopped being a reliable leg of growth.

An additional drag came from government consumption and public investment, which dropped by as much as 5.1% and—according to the data—subtracted roughly 0.9 percentage point from GDP growth. The cited cause is a government shutdown: a one-off factor, but one with a very real impact on the macro aggregates.

What kept the economy afloat?

On the positive side, investment moved to the forefront as a stabilizer. Intellectual property products rose the most (+7.4%), suggesting firms are still investing in development, technology and productivity. Equipment spending also increased (+3.2%). Structures remained in decline, but the contraction eased (-2.4% versus -5.0%), which is sometimes read as a sign of a “soft bottom” in that segment.

Residential investment fell by 1.5% after a steep -7.1% drop previously. This is not a rebound yet, but it does suggest some of the pressure from earlier quarters is fading.

On a full-year basis, 2025 ended with 2.2% growth (down from 2.8% in 2024)—slower, but still positive, driven mainly by consumption and investment. In other words: the economy is cooling, but it isn’t “going out.”

The private sector is growing, but in a lower gear

The latest S&P Global PMI reading for February 2026 fits the picture of softer growth, but adds an unfavorable element from a monetary-policy perspective: rising price pressure.

The Composite PMI slipped to 52.3 from 53.0. That’s still above 50—so expansion continues—but it’s the weakest pace since April 2025. The slowdown spans both services and manufacturing.

Three signals stand out: weaker new orders, a clear deterioration in export demand, and employment rising only marginally for the third month in a row—at the slowest pace since last April. At the same time, the PMI points to higher costs (with factors including tariffs and labor costs), and firms are raising selling prices at the fastest rate since August. This is an awkward combination, because central banks typically want to see inflation ease as growth cools.

Inflation is picking up again

Meanwhile, market data in the macro backdrop read like a warning. Core PCE inflation is holding around 3% year over year, and the monthly increase in December was about +0.4%. In practice, that means that even as growth slows, underlying inflation remains “sticky.”

The only more optimistic note in the PMI is improving sentiment: expectations for output over the next year are the highest in 13 months. This may suggest companies are counting on a better environment in coming quarters, though the hard components—orders, exports and hiring—don’t fully confirm that yet.

For the Fed, the conclusion is uncomfortable: the data don’t force urgency either toward easing or toward renewed tightening. The natural outcome is a “data-dependent” approach.

Relief after the tariff ruling, but uncertainty returns quickly

Against this backdrop comes trade policy—a factor that can rapidly reshape risk pricing across the entire economy. Equity markets rose after a Supreme Court decision that blocked “emergency” tariffs, finding that the administration had exceeded its authority. In response, the S&P 500 gained about 0.6%, the Nasdaq about 0.8%, and the Dow about 0.2–0.3%. Trade-sensitive stocks rallied more strongly, including Amazon (around +2%) and Alphabet (nearly +4%).

This is a classic relief reaction. A higher chance of reduced trade friction lowers the risk discount applied to global supply chains, margins and demand. The problem is that the relief isn’t “clean.” Trump announced he would try to preserve or recreate the tariff program via other routes, including consideration of a 10% global rate in a different form. That means the risk doesn’t disappear—it merely changes shape and legal footing. From companies’ perspective, the key question remains whether costs and uncertainty in trade will rise again.

Bonds and the dollar: markets aren’t buying simple narratives

In the rates market, the 10-year Treasury yield was around 4.08% (up a few basis points), while the dollar was slightly weaker. This combination fits an environment in which investors are simultaneously trying to price softer growth (1.4% GDP and slower PMI), the risk of persistent inflation (entrenched price pressures), and uncertainty around trade policy—which can raise costs and disrupt demand.

The economy is slowing, but a “hard landing” isn’t a given

The data paint a slowdown with several sources: weaker goods consumption, poorer exports, and a sharp drop in government spending with a shutdown component. At the same time, investment—especially in intellectual property and equipment—continues to support the foundations of growth, and real estate looks like a sector where declines may be nearing an end.

The biggest challenge, however, isn’t lower growth itself, but the fact that price pressures are accelerating again. In this setup, the Fed’s task is harder, and markets—even when they briefly react with relief to a single event—remain hostages to two uncertainties: how trade policy will evolve, and whether inflation will create room for any “quick relief” in monetary policy.