U.S. Department of the Treasury

Introduction

The U.S. economy remains resilient. While the picture of economic activity last quarter is somewhat obscured by the shutdown-related delay of official government statistics – as well as some missing data for October – economic data received through January 30, 2026 suggest that growth remained solid in  4Q25, with strong consumer demand and business investment in equipment and artificial intelligence. 

Meanwhile, labor supply and labor demand appear to be roughly in balance – and while hiring rates remain concerningly low, layoff rates are also low, suggesting that firms are delaying major labor decisions and achieving output growth via productivity improvements. Investment in and adoption of artificial intelligence may be contributing to the high productivity growth rates that the U.S. economy saw in 2Q25 and 3Q25. Turning to inflation, core price pressures eased in 4Q25. Monthly core goods prices were flat on average, and inflation for rent of housing slowed further. Accordingly, stock markets again reached record highs during 4Q25 and rose further in January 2026. Overall, the U.S. economy appears to be entering the new year on a firm footing.

Real Gross Domestic Product (GDP)

Owing to the government shutdown last autumn and subsequent delays in the reporting of source data, estimates for GDP in the latter half of 2025 were delayed.  As of January 30, the Bureau of Economic Analysis (BEA) has not yet released the advance estimate of GDP for 4Q25. The most recent estimate from BEA is for 3Q25, in which real GDP rose by a rapid 4.4%, picking up from an already brisk 3.8% pace in 2Q25. The acceleration reflected faster growth in personal consumption expenditure (PCE) and government expenditures, as well as positive, if slower, growth in business fixed investment (BFI) as well as a large contribution from net exports. Private domestic final demand growth was 2.9% for a second consecutive quarter (see Table 1 – Real Gross Domestic Product). 

Private-sector forecasters estimate that total economic growth remained solid in 4Q25. According to the most recent publicly available survey (the Wall Street Journal quarterly survey published on January 18, 2026), the median forecast for 4Q25 GDP growth was 2.2% at an annual rate – an upswing from the October survey median of 2.0% annualized growth. Preliminary monthly data suggests growth continues to be driven by strong private final domestic demand.

• In just October and November, average real personal consumption expenditures (PCE) were up 2.5% at an annual rate from 3Q25. If growth in December held at the average rate seen in the first two months of 4Q25, real PCE rose 3.2% at an annual rate last quarter.
• The Census Bureau’s monthly report on manufacturing shipments, inventories, and orders informs BEA’s estimate business fixed investment in equipment. According to the latest report, shipments of core (non-defense and excluding aircraft) capital goods have so far averaged $77.9 billion in October and November, a 6.7% annualized increase from 3Q25.
• Artificial intelligence continues to propel business investment. Through 3Q25, advances in artificial intelligence drove a surge in investment in data centers, computers and peripherals equipment, and software. Data center construction spending, in real terms, continued to rise in 2025, reaching $25.2 billion in 3Q25, up 22% at an annual rate year-to-date. Meanwhile, real investment in software also strongly increased through 3Q25, rising nearly 16% at an annual rate, year-to-date.

The BEA will publish its advance estimate for 4Q25 GDP on February 20, 2026.

Labor Markets

Labor markets have generally remained stable in recent months, though monthly job growth continued to moderate and the unemployment rate drifted somewhat higher (see Table 2 – Labor Market Indicators). Meanwhile, the headline labor force participation rate (LFPR), as well as prime age (ages 25 to 54) LFPR, improved during 4Q25, while measures of the demand for labor eased modestly.

• In 4Q25, the pace of net total (private and public) job creation dropped by 22,000 on average per month. However, this decline largely reflected an isolated and outsized drop in public payroll jobs during October, due to federal employees who were part of the Deferred Resignation Program being removed from federal payrolls for the first time. During the final two months of 2025, net job growth averaged 53,000 per month, a pace fully in line with paces in 2Q25 and 3Q25. Meanwhile, net private-sector job creation remained positive, though average job growth slowed to 29,000 jobs per month due to statistically insignificant job growth in October. In November and December, private payroll job growth averaged 43,500. Although job growth has slowed in recent years, it likely remains more than sufficient to match an expanding economy’s current requirements and to keep the unemployment rate relatively stable.
• Although the employment report provided data on payroll jobs for October 2025, the government shutdown prevented the survey of household employment situations, which yielded a gap in labor market assessments for 4Q25. However, the survey was conducted for November and December. In these final two months of 4Q25, the average unemployment rate crept up to 4.5% from an average of 4.3% over the three months of 3Q25. Even so, the increase in the unemployment rate is attributable to a low hires rate rather than a rising layoffs rate – the latter remains stable and low, and initial unemployment claims remain exceptionally low by historical standards. At 4.4% in December (latest available data), the unemployment rate is only 0.1 percentage point above the 2025 estimate by the Congressional Budget Office of the non-cyclical unemployment rate – or the rate of unemployment that is consistent with stable inflation and excludes fluctuations in aggregate demand.
• Labor force participation improved in November and December 2025. The overall LFPR increased to an average of 62.5%, matching the average rate in the first half of 2025. In addition, the LFPR among prime-age workers moved up to an average of 83.8% in late 2025. For almost three years now, the prime-age LFPR has hovered above 83%, and the average prime-age LFPR in November and December was 0.7 percentage points above the pre-pandemic peak. Among prime-age men, the average LFPR continues to rise above the pre-pandemic high of 89.4%, standing at an average 89.5% in 3Q25 before ticking up to an average 89.6% in late 2025. After a long period of improvement, the participation rate among those aged 55 or older has been easing in recent quarters, consistent with broader demographic trends. In November and December, the 55 or older LFPR averaged 37.9%, the lowest quarterly reading since early 2006.
• In 3Q25 and 4Q25, measures of labor demand continued to ease at the margin. From an average level of 7.4 million in 3Q25, average monthly job openings ticked down to 7.3 million in October and November (latest available data), while the ratio of job openings (or vacancies) per unemployed worker slipped to 0.9 in November. These readings mark a substantial retreat from their pandemic-era highs: average job openings were less than two-thirds of the record 12.1 million reading in March 2022, while the job openings per unemployed worker ratio is just under one-half of the record high of 2.03 in March 2022.
• Nonfarm business productivity surged in the middle of 2025, rising 4.1% in 2Q25 and 4.9% in 3Q25, as firms improved output with modest growth of labor inputs. The adoption of artificial intelligence may be contributing to such strong productivity growth since manufacturing productivity growth was lower than that for all nonfarm businesses.

Inflation

Overall, inflationary pressures subsided in 4Q25, with noteworthy slowing of key components. As of December 2025, twelve-month inflation – as measured by the headline consumer price index (CPI) – was 2.7%, retreating from the 3.0% rate over the year through September 2025 and 6.4 percentage points below the June 2022 peak. Average monthly inflation also slowed: average headline inflation was 0.2% per month in 4Q25, down from 0.3% in 3Q25 (see Table 3 – Inflation Indicators).

• Notwithstanding the slower headline rate, CPI inflation for energy goods and services ticked up in 4Q25 to an average 0.5% per month, following a monthly average of 0.4% in 3Q25.
• Food price inflation was stable at 0.3%, matching 3Q25’s monthly average. On a twelve-month basis, however, food price inflation was 3.1% through December 2025, up from 2.5% over the year through December 2024. Although inflation for food at home has slowed overall, price inflation for beef and coffee has accelerated, and inflation for food away from home rose in December to the highest yearly rate since July 2024.

Core CPI inflation, which excludes food and energy, slowed noticeably in 4Q25. After averaging 0.3% per month during 3Q25, core CPI slowed to an average 0.1%, marking the slowest quarterly average since June 2024. Over the twelve months through December 2025, the core inflation rate was 2.6%, down from 3.2% over the year through December 2024, and 4.0 percentage points below the post-pandemic peak rate in September 2022.

• Monthly core goods prices were flat on average in 4Q25, slowing from a monthly average of 0.2% in 3Q25 and marking the slowest quarterly pace since 3Q24. Prior to late 2024, inflation for core goods was either flat or negative on average for five consecutive quarters but during the first three quarters of 2025, the deflationary trend receded. On a twelve-month basis core goods inflation was 1.4% through December 2025. Although still below the paces of growth seen during the first two years of the previous administration, core goods inflation is elevated relative to pre-pandemic norms.
• Inflation for rent of housing services (rent of primary residence and owners’ equivalent rent) was stubbornly elevated between May 2023 through 2024 but began slowing last year. In each of the first three quarters of 2025, rent of housing inflation averaged 0.3% per month, but it slowed to an average 0.2% per month in 4Q25. Over the year through December 2025, rent of housing inflation was 3.3%, the slowest pace since January 2022.
• Inflation for non-housing core services slowed significantly in 4Q25, averaging 0.1% per month, after running at 0.4% per month on average in 3Q25. This reflected further disinflation for airline fares, prices for medical services, and auto insurance rates. Over the year through December 2025, non-housing core services inflation was 2.7%, slowing considerably from the 4.1% pace of a year earlier.

Inflation as measured by the PCE price index has notable differences in weights and methodologies versus the CPI. Over the past 20 years, twelve-month CPI inflation has exceeded PCE inflation by about 0.35 percentage points on average. Over the year through November 2025, the headline PCE price index was up 2.8%, accelerating from the 2.6% pace over the year through November 2024, and 0.8 percentage points above the Federal Reserve’s 2% inflation target.

Risks to the Outlook

Looking ahead to the next few quarters, the outlook for the U.S. economy faces upside and downside risks. However, on balance, economists view the risk of a recession as relatively low. According to The Wall Street Journal’s quarterly survey of economists, the average probability of a recession in the next twelve months was just 27%, down from a 33% average probability in the October survey and the lowest probability since January 2025.

Labor markets: Treasury is monitoring private-sector labor market developments closely. Employment growth has slowed this year. Nonetheless, labor markets appear to be in balance. Current data on labor supply and labor demand suggest both softened similarly in 2025, leading to soft hiring without a sharp rise in unemployment. This is likely due to a lower breakeven rate of payroll job growth given the sharp drop in population growth that accompanied the Administration’s enforcement of immigration law.

Since early 2022, the private sector hires rate has trended lower and was 3.5% as of November 2025, comparable to the slow recovery from the 2007 to 2009 recession. Even so, layoff rates also remain historically low: the private-sector layoff and discharges rate at just 1.2% in November 2025, below the 1.6% average from 2001 to 2019, just before the pandemic. With modest hiring but low layoff rates, firms appear to be shedding labor via attrition and using productivity growth to drive output. Further supporting evidence for the continued balance in the labor market is the stable, low levels of initial and continuing jobless claims.

Energy prices and geopolitical uncertainty: Geopolitical uncertainty continues to add upside risk to the medium-term inflation outlook. Energy prices are one of the most volatile categories of inflation, with geopolitical events leading to large swings. For example, the CPI for gasoline fell 13.8% from December 2024 to June 2025, jumped 15.9% at an annual rate from June to September, and advanced just 1.3% at an annual rate since September. Since high energy prices can lead to inflation for other consumer goods and services – such as food (through fertilizer and fuel for farming equipment) and airfares – they increase uncertainty for the outlook.

Artificial intelligence: Firms’ continued investment in artificial intelligence may lead to efficiency gains, particularly in service-sector industries where productivity growth historically has been slower. However, the timeline for when such boosts are realized, as well as the magnitude of said impetus, is still uncertain. If the integration of artificial intelligence acts as a standard technology improvement, productivity growth could return to historical norms after several years of above-trend growth. On the other hand, artificial intelligence could prove transformational and permanently upshift the path of productivity as it enables workers to build skills and human capital faster than in the past. Artificial intelligence also could have disruptive impacts on the economy and labor markets. Firms that are slow to adapt could find themselves at a competitive disadvantage, as could workers who delay incorporating artificial intelligence to improve their own skills’ growth and productivity.

Conclusion

Thus far in President Trump’s second term, the Administration has successfully stewarded major fiscal legislation to prevent a historic tax increase, and it continues to seek further policies to incentivize economic growth. Supply-side policies, deregulation, and other reforms will protect the American consumer from high inflation, supply-chain disruptions, and the destabilizing potential of geo-political strife while freeing up investment funds for more productive uses and encouraging a significant increase in domestic energy production. Indeed, the Administration has made extensive progress to enact an agenda that will bring prosperity to all Americans. 

Table 1 - Real Gross Domestic Product

Source. Bureau of Economic Analysis, Gross Domestic Product, 3rd Quarter 2025 (Updated Estimate), GDP by Industry, and Corporate Profits (Revised).

Table 2 - Labor Market Indicators

Sources. Bureau of Labor Statistics, The Employment Situation - December 2025; Job Openings and Labor Turnover - November 2025.

The BLS did not publish household survey measures for October due to the lapse in appropriations.

Table 3 - Inflation Indicators

Sources. Bureau of Labor Statistics, Consumer Price Index - December 2025. Bureau of Economic Analysis, Personal Income and Outlays, November 2025.

¹ For CPI, 12-month growth is not seasonally adjusted.
² Imputed from CPI Data.

³ PCE percent changes for Q4 are averages for October and November; 12-month percent changes are for November. PCE price indices for December will be released on February 20.