The fourth quarter kicked off with a prolonged government shutdown that caused widespread disruptions for many Americans.
But this came on the heels of strong economic growth in the third quarter, which saw GDP grow at an annualized rate of 4.3%, representing the fastest rate in two years. The growth was largely attributed to high-end consumer spending and an increase in net exports. With that said, what is under the surface presents a much muddier picture. The Congressional Budget Office estimated the shutdown will reduce fourth quarter GDP figures by 1.5%, although they noted many of the negative effects are temporary. We will not know for sure until fourth quarter figures are released in February, 2026. Diverging sentiments and trends also suggest a “K-shaped” economy is developing, whereby higher-income households are continuing to spend and grow their wealth while others lag behind. As new economic data were either delayed or disbanded during the shutdown, it can be difficult to assess how pronounced this divergence actually is. As such, it is critical to fill the gaps with private sector data and corporate trends to better gauge the economy’s true standing.
The labor market continued to show more signs of cooling towards the end of the year.
While the Labor Department’s data collection efforts were initially frozen during the shutdown, they issued delayed reports showing that 64K jobs were added in November, while 105K jobs were shed in October. The report also revised figures for August and September, both of which were worse than initially stated. Part of October’s decline was due to the federal government employees who were scheduled to voluntarily resign as part of a deal with the Trump administration. Federal jobs shrank by 162K in October, followed by another 7K cuts in November. Federal Reserve Chair Jerome Powell added further caution by noting that Fed staffers believe the government’s data may be overestimating job creation by approximately 60K per month, meaning that the U.S. has been potentially shedding 20K jobs per month since April of 2025.
Multiple headwinds are driving the slowdown in jobs creation. The uncertainty of rising supply costs and changing trade policies has led to cautious hiring by companies. While artificial intelligence comes with a promise of future efficiency improvements, the potential effect of this technology on the labor market remains unclear. Additionally, it is difficult to assess the strength of the labor supply as the State Department no longer publishes legal immigration data – a historically important source of information on workforce growth. These challenges have resulted in a slight uptick in the unemployment rate to 4.6% for November, the highest since the initial COVID layoffs in 2020.
All eyes are on the consumer – and rightfully so.
Consumer spending is the largest component of GDP and typically the main driver of the U.S. economy. Delayed economic data from the Bureau of Economic Analysis showed consumer activity growing modestly by 0.3% in September. During the fourth quarter, consumer activity continued to grow, but underlying spending patterns continued to diverge based on income levels. The auto industry saw the average cost of a new vehicle surpass $50K for the first time, and yet repossessions were up 12% on an annualized basis. Credit card data revealed weakness in restaurant sales, but higher-end restaurant bookings remained resilient. Domestic travel and hotel spending weakened significantly, partially due to the disruptions from the government shutdown; however, many airlines are expecting revenues from their premium seats to surpass those of coach seats in the coming year. This pattern repeated throughout various industries – the high-end consumer continued to spend, while middle- and lower-income households tightened their belts.
Looking ahead, consumer spending will be strengthened (or strained) by income, inflation, and taxes. Year-over-year wage growth is expected to slow from 3.8% to 3.5%, partially due to the weaker job market. Conversely, inflation has steadily ticked up since April as tariff effects continue to flow through, although the Bureau of Labor Statistics reported a slight decline in the figure to 2.7% for November. Watching the trajectory of these two metrics will be key, as real wage growth (i.e., gross wage growth minus the inflation rate) is ultimately what translates to affordability for consumers.
Fortunately, taxes may provide a much-needed boost. The One Big Beautiful Bill Act included new tax changes that may alleviate some consumer concerns. Average tax refunds are expected to climb from $3,200 to $4,000 this April and support spending in the first half of 2026. This tax relief, combined with resilient high-end spending, can provide meaningful support to economic activity in the near term. However, sustaining consumer spending will ultimately depend on real wage growth across all income levels.
