US Q4 GDP growth slowed to 1.4% (quarter-on-quarter, annualised) and 2.2% (year-on-year). The slowdown was mainly due to weaker government spending after the October/November shutdown.
Government spending fell 5.1% (quarter-on-quarter, annualised), which shaved 0.9 percentage points off headline GDP. Core GDP (PDFP)—which excludes government, net exports, and inventories—rose 2.4% in Q4, down from 2.9% in both Q2 and Q3.
Consumer Spending And Inflation Signals
Consumer spending rose 2.4% (quarter-on-quarter, annualised) in Q4, down from 3.5% in Q3. Spending on goods edged lower, while spending on services rose 3.4%.
In December, core PCE inflation increased 0.36% month-on-month, and headline PCE also rose 0.36%. The cited forecasts were 0.25% for core and 0.27% for headline, with a 0.3% consensus for both.
TD Securities expects the data to normalise after November’s softer readings. Based on CPI data, it forecasts January core PCE at 0.19% and headline PCE at 0.12%. The note also points to slower spending early in the year, ahead of tax refunds.
In hindsight, the early-2025 view that the Q4 2024 slowdown was temporary was mostly right. Government spending did rebound in Q1 2025, which helped avoid a deeper downturn. Over the past year, the economy has shown underlying strength, even with some weak spots.
That report also flagged a cooling US consumer, and that trend has become more persistent. The unemployment rate has climbed gradually to 4.1%, and the latest Q4 2025 GDP report shows growth at a modest 2.5%. This slower consumer backdrop is a key reason markets are now leaning toward a shift in monetary policy.
The earlier warning not to overreact to the upside surprise in core PCE also proved sensible. Inflation cooled through 2025, but it has stayed sticky. With January 2026 core PCE still at 2.8% year-on-year, the Fed remains cautious. Even so, slower growth has led derivatives markets to price a 75% chance of a rate cut by the June 2026 meeting.
Market Positioning And Rate Cut Timeline
In this setup, options activity in SOFR futures has picked up, especially trades that benefit if a rate cut happens between June and September. Traders should also watch for higher volatility around upcoming inflation and jobs data. Surprises versus expectations could quickly shift the Fed’s timing. The yield-curve flattening last fall is a reminder of how fast markets can reprice when policy expectations change.
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