US Shutdown Drag Masks Underlying Resilience as Fed Seen Holding Rates

United States (US) quarterly GDP growth slowed sharply in the final quarter of 2025, but according to advisory firm Frans Cronje Private Clients, the weakness was driven mainly by a temporary collapse in government spending linked to the record federal shutdown, rather than a broad-based deterioration in private demand. At the same time, inflation remains well above target and the labour market has tightened further, leaving the US Federal Reserve expected to hold rates steady at its next meeting, due to be held in March.

A note from the firm says, “US GDP growth slowed to 1.4% quarter-on-quarter in Q4 2025, down from 4.4% quarter-on-quarter in Q3. The key driver was a -5.1% contraction in government consumption expenditures, a sharp reversal from 2.2% growth in Q3, following large federal spending cuts during the shutdown that ran from 1 October to 12 November. Overall government spending fell by -16.6% in Q4 versus 2.7% growth in Q3, with non-defence spending down -24.1% compared to -1.4% in Q3, and defence spending down -10.8% compared to 5.7% growth in Q3. Personal consumption also slowed, easing to 2.4% quarter-on-quarter in Q4 from 3.5% quarter-on-quarter in Q3.”

For the full year, growth came in at 2.2% in 2025, down from 2.8% in 2024. The bulk of that deceleration is attributed to government spending growth slowing to 1.2% in 2025 from 3.8% in 2024. Other components also cooled, with personal consumption expenditure easing to 2.7% from 2.9% and gross private domestic investment dropping to 2.0% from 3.0%.

The data imply that the headline slowdown may overstate underlying weakness.
According to Bheki Mahlobo, who drafted the note, “If government spending had remained at 2024 levels, 2025 GDP growth would have been 2.7% rather than 2.2%, and Q4 growth would have been 2.9% rather than 1.4%.” On that basis, the US economy appears to be carrying more positive momentum into 2026 than the top-line GDP figure suggests.

Despite weaker Q4 growth, the inflation and labour backdrop points to a rate hold decision from the Fed in March. Personal Consumption Expenditures inflation, the Fed’s preferred measure, rose to 2.9% in December 2025 from 2.8% in November, and therefore was well above the Fed’s 2% target. The unemployment rate fell to 4.3% from 4.4%, while net new jobs rose to 130 000, beating expectations of 70 000 and well above November’s 48 000.

According to Mahlobo, “The US Fed has a dual mandate to tame inflation and promote employment. With inflation up and the labour market looking solid enough, the Fed will likely look to hold rates on 18 March. Should it do so then the South Africa’s central bank will likely follow suit, although I continue to pencil in 50 basis points of cuts for both economies this year.”