The U.S. is Slowing, but Inflation Won’t Let Up

Overview

In the fourth quarter of 2025, the U.S. economy experienced a significant slowdown, with GDP growth falling to 1.4% (annualized) from 4.4% in the previous quarter. This decline was attributed to weaker consumer goods consumption, a drop in exports, and a notable decrease in government spending due to a government shutdown. Despite this, business investment, particularly in intellectual property and equipment, provided some support to the economy.

Key Economic Indicators

The S&P Global Composite PMI for February 2026 indicated a continued expansion at a slower pace, with a reading of 52.3, the lowest since April 2025. This slowdown was characterized by reduced new orders, diminished export demand, and minimal hiring. Concurrently, input costs and selling prices were on the rise, complicating the Federal Reserve's policy decisions.

GDP Growth Analysis

Consumer spending growth decelerated to 2.4%, with a notable decline in goods purchases. Exports fell by 0.9%, and government consumption dropped by 5.1%, significantly impacting GDP growth. However, investment in intellectual property products rose by 7.4%, indicating ongoing corporate investment in technology and productivity.

Inflation Trends

Core PCE inflation remained stubbornly high at around 3% year-over-year, with a monthly increase of 0.4% in December. This persistent inflation poses challenges for the Federal Reserve, as it complicates the balance between managing growth and controlling price pressures.

Trade Policy Implications

Equity markets reacted positively to a Supreme Court ruling that blocked "emergency" tariffs, leading to gains in major indices. However, uncertainty remains as efforts to implement tariffs through alternative channels could reintroduce trade risks. The market's response reflects a complex interplay between growth expectations and inflationary pressures.

Market Outlook

The current economic landscape suggests a slowdown characterized by weaker consumption and government spending, yet supported by ongoing investment. The Federal Reserve faces a challenging environment, needing to navigate between potential easing and tightening of monetary policy amidst persistent inflation and trade uncertainties.

Conclusion

While the U.S. economy is cooling, it is not in a state of crisis. The interplay of slowing growth and rising inflation presents a complex scenario for policymakers and investors alike, necessitating a careful, data-dependent approach moving forward.