Q4 US GDP Beyond the Shutdown

Amidst a busy news stretch last week, America’s Bureau of Economic Analysis (BEA) released its advance estimate of Q4 US gross domestic product (GDP, a government-produced measure of economic output), which was delayed by an autumn government shutdown. A lot of coverage we follow focussed on weak points, including government consumption and investment as well as net exports (exports minus imports). But GDP’s private sector components indicate economic output remains largely in line with its healthy, longer-term growth trend.^[i] Whilst backward-looking, we think this further confirms the US economy ended 2025 on solid ground—useful perspective given today’s apparent scepticism.

Q4 inflation-adjusted GDP growth slowed from Q3’s 4.4% annualised to 1.4%, missing economists’ consensus expectations of 1.9%.^[ii] Looking at some of the primary underlying components, personal consumption expenditures decelerated (to 2.4% annualised from Q3’s 3.5%) due to durable goods’ -0.9% contraction, whilst business investment accelerated slightly to 3.7% from 3.2% thanks to equipment and intellectual property products spending.^[iii] On international trade, both exports (-0.9% annualised) and imports (-1.3%) slipped.^[iv]

The headliner, though, was last year’s US federal government shutdown. President Donald Trump claimed the shutdown—which lasted a record 43 days, from 1 October – 12 November—cost the country “at least two points in GDP.”^[v] Whilst the BEA said it couldn’t fully quantify the partial shutdown’s economic effects, it estimated the reduction in federal government services subtracted about -1.0 percentage point from Q4 growth.^[vi] Fair enough, though the shutdown focus highlights one of our gripes with GDP: It treats government spending as an automatic positive and reductions an assured negative (i.e., rising government spending and investment adds to GDP).

Mind you, we aren’t inherently against government spending. We just think its economic influence is overstated and that GDP’s maths hide the risks of misallocated spending. On the former, the federal government generated 6.4% of 2025 GDP—behind state and local governments’ 10.8% and the private sector’s 82.9%.^[vii] On the latter, government spending and investment don’t create new activity, according to our research. Rather, the government redistributes tax revenue to areas where it sees fit (i.e., it chooses winners and losers). Some of this spending may be immediately productive. Some may have to recirculate a few times before finding its optimal use. In our view, the private sector is a more efficient allocator of resources and capital because the incentives require it to be.

Moreover, since stocks are publicly traded companies, we think investors benefit most from focussing on GDP’s private sector components: consumer spending, business investment and residential real estate. These components, which we refer to as private sector GDP, collectively rose 2.0% annualised.^[viii] We have read financial commentary arguing AI-related investment is doing much of the heavy lifting, and our studies show this claim has some merit. Information processing equipment and software investment contributed 4.65 percentage points to Q4 business investment, offsetting declines in structures spending and transportation equipment.^[ix] These tech-related categories have driven business investment growth since Q4 2023, whilst private fixed investment in structures has detracted since Q1 2024.^[x] Yet this development is also well-known, in our view, and helps reduce expectations for other parts of the economy, extending the proverbial wall of worry stocks climb. Most coverage we read cites it as a risk. Even a report that seemingly tried to dismiss it as a source of growth did so by arguing most of the investment is going overseas via imported semiconductors, a pretty dour take, in our view.^[xi]

Looking at the bigger picture, Q4 private sector GDP growth remains in line with its recent trend. (Exhibit 1) Whilst headline GDP expanded as quickly as 4.7% annualised (Q3 2023) and contracted as much as -1.0% (Q1 2022) over the past three years, private sector GDP chugged along, averaging 2.2% annualised growth over the past 16 quarters.^[xii] America’s primary growth engine closed out last year in fine fettle, in our view.

Exhibit 1: US GDP Over the Past Three Years

Source: Bureau of Economic Analysis, as of 2/20/2026.

The broad reaction to America’s Q4 GDP report echoes analyses of other recent data—worth keeping in mind given America’s share of global growth and markets. Sentiment toward the US has cooled this year based on our observations, with serious optimism giving way to some renewed fear. Most coverage we saw zeroed in on the government shutdown’s real-but-overstated hit to headline growth despite the private sector’s ongoing expansion. S&P Global’s flash February US purchasing managers’ index (PMI) garnered a similar reaction. Despite a composite PMI reading of 52.3 (readings over 50 imply growth), indicating expansion, businesses warned of headwinds from tariffs, rising prices and political uncertainty.^[xiii] Interestingly, one headline noted “US Business Activity Growth Slows as Europe Picks Up Pace”—even though America’s February reading was better than the eurozone’s 51.9!^[xiv]

Whilst the data aren’t telling a new story—US growth isn’t gangbusters, but it is holding up just fine—the interpretations of the numbers have turned more dour. The return of some US false fears likely adds more bricks in the wall of worry bull markets climb, a bullish development for stocks.