The Bureau of Economic Analysis confirmed Thursday that the U.S. economy grew at an annualized rate of 0.7 percent in the fourth quarter of 2025, the weakest quarterly performance since the pandemic-era contraction of 2020 and well below the consensus forecast of 1.4 percent that Bloomberg's survey of economists had produced ahead of the release. Full-year GDP growth for 2025 came in at 2.1 percent, down from 2.9 percent in 2024 and at the lower end of the range that the Federal Reserve had projected in its September Summary of Economic Projections. The release reflects an economy that was already decelerating before the late-February outbreak of the Iran war, with consumer spending growth easing across most categories, business fixed investment in equipment and structures contracting for the first time in six quarters, and the trade deficit widening as imports rose and exports declined under the weight of accumulated tariff uncertainty.

What Drove the Slowdown

Real personal consumption expenditure, which accounts for roughly 70 percent of GDP, grew at an annualized rate of 1.2 percent in the fourth quarter, down from 3.1 percent in the third, with the deceleration concentrated in durable goods purchases of automobiles, appliances, and furniture that are most sensitive to interest rates. The thirty-year fixed mortgage rate held above 6.5 percent through the quarter according to Freddie Mac's weekly survey, and the average new-vehicle loan rate tracked by Cox Automotive hovered near 8 percent, both of which have meaningfully raised the carrying cost of the durable purchases that historically lead a consumer recovery and have correspondingly suppressed the volume of those purchases at the margin.

Business fixed investment declined at an annualized rate of 0.8 percent, dragged down by falling spending on industrial equipment and on nonresidential structures, with the contraction in equipment investment particularly concentrated in sectors most exposed to global supply chain reorganization. Several CEOs on quarterly earnings calls in late February attributed deferred capital allocation decisions specifically to tariff uncertainty, with the CEO of Caterpillar telling analysts that the company was "delaying decisions until the rules stabilize" and the CFO of 3M citing "an environment in which planning horizons have shortened to the next quarterly tariff announcement." The pattern is consistent across the industrial sector and is visible in the BEA's detailed component data, which shows U.S. private equipment investment running at the slowest pace since 2016 in volume terms.

Net exports subtracted approximately 0.6 percentage points from headline growth as imports rose and exports fell. The strong dollar, sustained by relatively high U.S. interest rates compared to other advanced economies, has made American goods more expensive in foreign markets while making imports cheaper at the dock, an effect that the tariffs have complicated rather than reversed because the tariffs have raised input costs for American manufacturers that rely on imported components and therefore narrowed the price advantage that domestic substitution would otherwise have produced.

The Pre-War Context

The fourth-quarter data captures conditions that prevailed before Operation Epic Fury began on February 28, and the comparison between the economy that the United States carried into the Iran war and the economy that the country carried into previous major military operations is informative. The economy that entered the 2003 Iraq War was emerging from a mild recession with substantial labor-market slack, low interest rates by the standards of recent decades, and oil trading at approximately $30 per barrel, all of which created room for war spending to function as fiscal stimulus rather than as inflationary pressure. The economy that entered the Iran war in early 2026 looked materially different on each of those dimensions, with unemployment near 4.1 percent and the labor market operating close to full employment, the federal funds rate near 4.5 percent and the longer end of the Treasury curve elevated, and oil already in the high $80s before the conflict drove it through $100.

The federal deficit was already running at approximately 6 percent of GDP before any war supplemental spending was added, a figure that several Treasury auctions have since had to absorb at higher yields than the Office of Management and Budget had projected when it constructed the fiscal-year baseline last summer. War spending will mechanically boost reported GDP in the short term because military expenditure counts as government consumption in the national accounts, but the boost is an arithmetic artifact rather than a measure of genuine economic health, and the inflationary effect of higher energy prices is likely to offset whatever growth benefit the military spending produces in real terms.

The Recession Question

The technical question of whether the United States will record two consecutive quarters of negative growth and therefore meet the textbook definition of a recession has dominated the financial-press coverage of the release, but the more relevant analytical question is the depth and shape of any downturn rather than its formal classification. Moody's Analytics put its model-based recession probability at 42 percent in its Friday morning client note. JPMorgan's economics team estimated 35 percent in a research note distributed Thursday afternoon. Bloomberg's survey of consensus forecasts produced a probability of approximately 30 percent, with the range across forecasters widening sharply as the Iran conflict has progressed.

A shallow recession driven primarily by elevated energy costs and trade-related uncertainty would be painful but manageable on the available policy tools, with the labor market still relatively tight, household balance sheets in their best aggregate condition since before the financial crisis, and the banking system carrying capital ratios well above regulatory minima. A deeper recession triggered by a sustained oil shock, a credit event, or a loss of business confidence would be considerably more difficult to manage because the Federal Reserve's primary easing tool is constrained by inflation that has not yet returned to the 2 percent target, and the fiscal tool of deficit spending is constrained by a debt-to-GDP ratio that already exceeds 120 percent and that the bond market has begun pricing more conservatively in the post-Iran-war auctions of long-duration Treasuries.

The 0.7 percent print is not in itself a signal of imminent contraction, with Atlanta Fed's GDPNow tracker showing first-quarter growth running closer to 1.5 percent on the strength of the Iran-war-related defense spending that began flowing through government accounts in March. The release is, however, an indication that the economy entered 2026 with materially less resilience than the headline employment and consumption figures of late 2025 had implied, and that the policy responses available to address any further deterioration are constrained in ways that they have not been during previous post-war stimulus cycles. Policymakers at the Federal Reserve, in the Treasury, and on the relevant congressional committees will be watching the first-quarter data, due in late April, for evidence of whether the deceleration is troughing or whether the Iran-war-driven energy and uncertainty shocks are deepening it.