Real Gross Domestic Product (GDP) rose at an annualized rate of just +1.4% in the fourth quarter, according to the US Bureau of Economic Analysis. This was below most economists’ expectations and a marked slowdown from the third quarter’s strong pace. The government shutdown played a meaningful role in this deceleration, weighing on government spending and investment. While current evidence suggests the shutdown was more of a one-off event than the start of a broader slowdown, it remains important to monitor growth trends alongside other key economic indicators.
Inflation has also not cooled to the degree the Federal Reserve would prefer. Core Producer Price Index (PPI) rose +0.8% month-over-month in January, while headline PPI increased +0.5% month-over-month, both above expectations. PPI reflects the prices businesses receive for their goods and services and provides insight into how firms are responding to input costs.
The Personal Consumption Expenditures (PCE) price index increased +0.4% in December and +2.9% year-over-year, also exceeding forecasts. PCE is the Federal Reserve’s preferred inflation gauge, but this release was delayed longer than usual due to the government shutdown. Further complicating the Fed’s path forward are energy prices, which are expected to trend higher amid potential supply disruptions in the Middle East. Sustained increases could place renewed upward pressure on inflation in the
months ahead.
The outlook for tariffs has become increasingly uncertain following the Supreme Court’s ruling that President Trump exceeded his authority by imposing certain duties without clear congressional authorization. As a result, a significant portion of existing global tariffs were deemed invalid, and an estimated +$100 Billion in previously collected tariffs may need to be refunded. This process could take months, or even years, given the likelihood of extensive litigation from affected businesses.
Despite this setback to a central policy initiative, the administration has enacted a temporary global tariff under a separate provision of the Trade Act of 1974. This measure is expected to remain in place for 150 days unless extended by Congress and will likely face legal challenges of its own. The broader implication is continued uncertainty for businesses and the global economy amid an evolving trade landscape. To date, much of the tariff impact has been absorbed by businesses, but as we move into the second year, the key question is how much of these costs will ultimately be passed on to consumers.
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