Economic Growth Revised Sharply Down to 0.7% After Historic Government Shutdown—but Don’t Expect Fed Cuts

The U.S. economy's growth in late 2025 was dramatically slower than initially reported, in large part due to the fallout from last fall's record-breaking government shutdown.

Gross domestic product (GDP), the total monetary value of the nation's goods and services, increased at an annualized rate of just 0.7% from October through December 2025, the Commerce Department said Friday in its second estimate. 

This is half of the government's first estimate of 1.4%, representing a sharply weaker-than-anticipated growth driven by downturns in government spending and exports, and a cooling in consumer spending. 

Exports saw the steepest downward revision, from -0.9% reported in the initial estimate to -3.3%.

However, according to the report, the main culprit behind the slump was last year's shuttering of the federal government, which began Oct. 1 and lasted 43 days—the longest in U.S. history. The historic impasse in Washington, DC, shaved more than a percentage point off the GDP growth in the fourth quarter.

For context, GDP grew at an annual rate of 4.4% in the third quarter and 3.8% in the second, which followed President Donald Trump's sweeping tariff rollout. 

For all of 2025, GDP increased by 2.1%, revised down 0.1 percentage point from the previous estimate, marking the slowest annual growth since 2020.

Typically, the Federal Reserve would have responded to sluggish GDP growth by slashing interest rates to give the economy a shot in the arm, but Realtor.com® senior economist Joel Berner says the central bank's policymakers may not be in the position to do that for fear of stoking inflation in the middle of the ongoing conflict in Iran, which sent oil prices surging in March.

"This news should lead to rate cuts, but the price pressures in the economy may not allow for them," says Berner.

Financial markets now put the probability of the Fed holding interest rates steady at their current 3.5%-3.75% range at 99.1% during the next Federal Open Market Committee (FOMC) meeting on March 17-18, according to CME FedWatch.

For the housing market, Berner says weaker-than-anticipated economic growth is unlikely to directly impact buyers this spring, except for the deflating effect that disappointing economic readouts may have on consumer confidence.

"The economy being perceived as weak may lead would-be homebuyers to worry about their own job stability, which may make them less likely to want to buy a home," notes the economist.

The latest report from the Bureau of Labor Statistics released last week showed that unemployment in February ticked up to 4.4% and nonfarm payrolls shrunk by 92,000 jobs. 

The bigger concern for homebuyers, according to Berner, is the rising specter of "stagflation," which refers to a toxic mix of inflation without economic growth—a condition that characterized the 1970s, when tensions in the Middle East sparked oil shocks in the U.S.

Domestic gas prices have been rapidly rising, with the national average price for regular grade reaching $3.63 a gallon Friday, up 9% from a week ago, according to AAA.

"Stagflation is especially nasty because there is not a clear monetary policy solution to it," explains Berner. "Cut rates, and inflation will soar even higher. Raise rates, and the economy gets choked off and unemployment soars."

The economist warns that stagflation in the housing market would spell high mortgage rates and anxious buyers, likely leading to a major downward correction in home values.