AI Investment and Tax Cuts Seen as Key Drivers for 2026 Recovery
The US economy lost steam in the final quarter of 2025, as the prolonged government shutdown and softer consumer spending dragged growth well below expectations. Fresh data from the Bureau of Economic Analysis shows gross domestic product (GDP) expanded at an annualized rate of 1.4% in the fourth quarter — a sharp slowdown from the 4.4% pace recorded in the third quarter.
Economists had projected growth closer to 3%, but the 43-day federal shutdown significantly disrupted economic activity. According to estimates from the Congressional Budget Office, the shutdown shaved roughly 1.5 percentage points off GDP by reducing government services, lowering federal spending, and temporarily cutting Supplemental Nutrition Assistance Program (SNAP) benefits. While most of the lost output is expected to be recovered, analysts believe between $7 billion and $14 billion may be permanently lost.
The delayed GDP report also reflects deeper structural concerns within the US economy. Job growth slowed dramatically in 2025, with only 181,000 positions added — the weakest annual gain outside the pandemic period since the 2009 recession. This has fueled concerns about what some economists describe as a “jobless expansion,” where economic growth fails to translate into meaningful employment gains.
Consumer spending, which accounts for more than two-thirds of US economic activity, also cooled in the fourth quarter. After rising at a strong 3.5% rate in the previous quarter, spending growth decelerated as inflation and higher import tariffs eroded purchasing power. Economists note that much of the spending strength has come from higher-income households, while lower-income consumers continue to feel financial pressure — contributing to what many describe as an affordability crisis.
Despite the slowdown, several factors could support economic growth in 2026. Anticipated tax refunds linked to recent tax cuts are expected to give consumers additional spending power. Meanwhile, investment in artificial intelligence (AI) remains a bright spot. Analysts estimate AI-related sectors — including data centers, semiconductor manufacturing, software development, and research — accounted for roughly one-third of GDP growth during the first three quarters of 2025, offsetting some of the negative effects from tariffs and reduced immigration.
Former President Donald Trump weighed in on social media, blaming the shutdown for weakening growth and calling for lower interest rates. However, economists suggest the latest GDP figures are unlikely to influence immediate monetary policy decisions.
While the fourth-quarter data paints a picture of slower momentum, expectations remain cautiously optimistic that AI-driven investment and fiscal stimulus could help stabilize and potentially accelerate US economic growth in the year ahead.
