Fourth Quarter Economic Growth Expected to Cool Despite Strong AI Investment

The U.S. economy likely expanded at a more moderate 3.0% pace in the fourth quarter, down from 4.4% in the previous quarter, due to government shutdown disruptions and reduced consumer spending. Despite the slowdown, artificial intelligence investments and tax cuts are expected to fuel economic activity this year, though many Americans aren't feeling the benefits due to ongoing affordability challenges.

WASHINGTON – The nation’s economic expansion probably decelerated to a more moderate but still healthy rate during the final three months of last year, as the prolonged government shutdown and cooling consumer purchases weighed on overall activity, according to economic forecasts.

This anticipated deceleration in the country’s gross domestic product would mark a shift after two consecutive quarters of strong economic performance. The Commerce Department plans to release its preliminary fourth-quarter GDP figures on Friday, with the report delayed due to the unprecedented 43-day federal government closure.

The upcoming data is projected to reveal a complex economic landscape featuring what analysts describe as a “K-shaped” recovery, where wealthy Americans continue to prosper while middle and lower-income families face financial strain from elevated prices linked to import duties and stagnant wages. These circumstances have sparked what economic experts and critics of President Donald Trump’s policies describe as a cost-of-living emergency.

“We’ll end the year still on a solid note in terms of growth, but it doesn’t really translate to feel as good as it looks on paper to most Americans,” said Diane Swonk, chief economist at consulting firm KPMG.

Economic analysts surveyed by Reuters anticipate GDP expanded at a 3.0% annual rate during the October-December period, marking a decline from the 4.4% growth recorded in the third quarter. However, this forecast was prepared before Thursday’s trade data revealed the trade gap had widened to its largest level in five months during December.

The worsening trade balance for the second month running prompted the Atlanta Federal Reserve to lower its GDP projection to 3.0% from its earlier 3.6% estimate.

The nonpartisan Congressional Budget Office calculated that the government shutdown would reduce fourth-quarter GDP by 1.5 percentage points through diminished federal services, reduced government purchases, and temporary cuts to food assistance benefits.

While the CBO projected most economic losses would eventually be recouped, between $7 billion and $14 billion in activity would be permanently lost. Economic researchers estimate the economy grew 2.2% for all of 2025 following 2.8% expansion in 2024. Employment gains totaled just 181,000 last year, representing the smallest increase outside the pandemic era since the 2009 recession and a sharp drop from 1.459 million new jobs in 2024.

“You have a confluence of shocks affecting the U.S. economy,” said Gregory Daco, chief economist at EY-Parthenon. “You have on the one hand the drag from higher prices, tariffs, trade restrictions and reduced immigration, but also the boost from AI investment and the continued strong momentum in terms of stock prices supporting ongoing spending by the more affluent consumers.”

Consumer spending growth is forecast to have moderated from the third quarter’s robust 3.5% rate. Economists note that purchasing activity has been primarily fueled by upper-income families and has come at the cost of savings as inflation has diminished purchasing power.

“Getting richer is one thing, but most households rely on incomes to pay bills, and real disposable income pretty much stalled in the quarter,” said Sal Guatieri, a senior economist at BMO Capital Markets.

Household spending may receive support from what economists expect will be larger tax refunds this year due to tax reductions. Business investment is anticipated to maintain a steady pace, driven largely by artificial intelligence initiatives. The surge in December imports was partially attributed to capital equipment purchases, including computer components and telecommunications gear amid a data center construction surge to support AI operations.

This investment activity should counterbalance any negative impact on GDP from trade flows.

Economists calculate that AI-related activities, encompassing data centers, semiconductors, software development, and research, contributed one-third of GDP growth during the first nine months of 2025, helping to cushion the economic impact of tariffs and immigration restrictions.

“It’s a significant contribution from a sector that traditionally has represented a small share of the economy,” said EY-Parthenon’s Daco. “It’s also been a key source of volatility in the trade data, because a lot of what we are building here and creating is imported.”

Economic analysts estimate that international trade provided minimal contribution to GDP after supporting growth for two consecutive quarters. Business inventories remained unpredictable, having reduced GDP for two straight quarters.

Housing investment is expected to have declined for the fourth consecutive quarter as construction companies and potential buyers grappled with elevated financing costs.

The delayed economic report will likely have minimal influence on Federal Reserve policy decisions. However, central bank officials will closely monitor December’s Personal Consumption Expenditures inflation figures, scheduled for release alongside the GDP data.

Economists surveyed by Reuters predict core PCE inflation, which excludes volatile food and energy prices, increased 0.3% monthly. Core PCE inflation advanced 0.2% in November compared to the previous month. Annual core PCE inflation was projected to reach 2.9% after climbing 2.8% in November. The Federal Reserve maintains a 2% inflation objective.

“The year-on-year growth rate of the core has shown essentially no progress since mid-2024,” said Lou Crandall, chief economist at Wrightson ICAP. “Many Fed officials anticipate at least some improvement in the coming months, but they will want to see that show up in the actual numbers.”