The US economy grew just 0.7% last quarter, ahead of a potentially destabilizing war with Iran

By Bryan Mena, CNN

Washington (CNN) — US economic growth was even weaker than previously reported at the end of last year, dragged down by the historic government shutdown, even before America’s war with Iran.

Gross domestic product, the broadest measure of economic output, expanded at an annualized rate of 0.7% in the October-through-December period, the Commerce Department said Friday in its second estimate. That’s down sharply from the 1.4% rate initially reported, and a much slower pace than the 4.4% in the third quarter.

The latest estimate revised several output categories lower, including exports, consumer spending and government outlays. The biggest downward revision was to exports, which contribute to GDP, revised down to -3.3%, much lower than the -0.9% reported in the first estimate.

The government shutdown was still the biggest factor subtracting from GDP in the fourth quarter, shaving off 1.16 percentage points. Economists widely expect most of those losses to be recouped in the current quarter that stretches from January through the end of March.

“The big downward revision in GDP is a gut check going into this energy crunch, increasing the risk of stagflation,” David Russell, global head of market strategy at TradeStation, wrote in analyst note Friday.

The fourth quarter capped a tumultuous year for the US economy as Trump waged a bid to reshape global trade and businesses ramped up investments in AI while slamming the brakes on hiring. The economy expanded just 2.1% in 2025, the weakest annual pace since 2020, and before that, since 2016.

Yet, despite the uncertainty, American shoppers continued to open their wallets, though it’s unclear how much longer that may remain the case in the face of a weakening labor market and historically weak consumer attitudes toward the economy.

The US economy is currently facing the economic effects of Trump’s war on Iran, which has already sent oil prices skyrocketing and pushed up prices at the pump for Americans, with more inflation pain expected if the war broadens or is prolonged.

The oil shock comes as the US labor market remains in a precarious state, with employers shedding 92,000 jobs in February as the unemployment rate rose to 4.4% from 4.3%.

In another troublesome sign, American consumers weren’t rushing to spend more money at the start of this year as concerns about job security grew, a separate report from the Commerce Department showed Friday.

Consumer spending held firm at a 0.4% rate in January from December, according to Personal Consumption Expenditures data. That matters for the broader economy, since spending represents about two-thirds of US economic activity.

However, the Federal Reserve’s preferred inflation gauge showed slight improvement in January, according to the same report. On an annual basis, it grew at 2.8% versus 2.9% in December. And on a monthly basis, inflation was up 0.3% compared to 0.4% in December.

“This is only going to head higher as the energy shock comes through,” Sonu Varghese, chief macro strategist at Carson Group, wrote in commentary issued Friday. “An already large headache for the Federal Reserve is going to turn into an even larger one, and it’s likely the Fed will not cut rates in 2026 and may even start talking about rate hikes later this year.”

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CNN’s Elisabeth Buchwald contributed reporting.