The markets got a twin dose of macro indicators today—GDP growth and PCE inflation—and, almost on cue, much of the commentary missed the signal for the noise.
Start with growth.
Real GDP in 2025:Q4 came in at 1.4%, well below the 2.8% consensus estimate. The immediate narrative was predictable: the economy is slowing into 2026, momentum is fading, the expansion is rolling over, tariffs are to blame.
That reading is wrong.
According to the Council of Economic Advisers, the topline was artificially depressed by the 43-day Schumer–Jefferies federal shutdown—the longest in U.S. history. CEA estimates the shutdown shaved about 2 percentage points off headline GDP: 1.0 percentage point from federal payrolls, 0.4 percentage points from federal contracts, and 0.7 percentage points from spillover effects, assuming a 1.5 consumption multiplier.
The BEA’s own accounting shows federal government expenditures subtracted 1.15 percentage points from growth in Q4. Strip that out, and growth would have printed north of 3%—right in line with expectations.
Importantly, much of this hit is mechanical. As furloughed workers return and federal activity normalizes, roughly 1.0 to 1.5 percentage points of growth should bounce back in Q1. But the spillover effects—lost activity, deferred hiring, shelved contracts—are permanent. That lost output to shutdown politics doesn’t reappear on a future balance sheet.
Look beneath the hood and the private sector story is solid.
Consumer spending added 1.58 percentage points to Q4 growth, almost entirely from services consumption, which alone contributed 1.59 percentage points. Investment added another 0.66 percentage points. Within that category, equipment investment rose at a 3.2% annual rate and intellectual property products surged 7.4%. Final sales to private domestic purchasers—a clean measure of underlying demand—grew at 2.4%.
There were drags. Motor vehicle output subtracted 1.41 percentage points, partly reflecting the termination of the $7,500 EV tax credit. Residential investment slipped modestly. But the core growth engine—household services consumption and business fixed investment—remains intact.
This sets up for a stronger 2026 than the headline number suggests.
Now turn to inflation.
The Q4 PCE price index rose at a 2.9% year-over-year rate, with core PCE at 3.0%. On a quarterly annualized basis, core PCE ran at 2.7%. December alone saw a 0.4% monthly increase in both headline and core PCE.
On the surface, that looks uncomfortably warm.
But there are three reasons to interpret this carefully.
First, PCE typically lags CPI in turning points. CPI has been trending lower in recent prints, suggesting pipeline disinflation that may not yet be fully reflected in the PCE construct.
Second, the year-over-year comparison is distorted by base effects. Biden’s final month in office—still embedded in the trailing 12-month window—was unusually hot. As that drops out of the calculation in coming months, year-over-year PCE should mechanically moderate.
Third, PCE includes significant imputed components. One example is the cost of portfolio management services. When equity markets rise, fees as a share of assets rise—even if no underlying “price” has changed in a conventional sense. That boosts measured PCE inflation without reflecting broad consumer price pressures. Market-based PCE—which excludes imputed components—came in meaningfully lower at 2.6% year over year.
In other words, the inflation story is less alarming than the topline suggests, just as the growth story is stronger than the 1.4% headline implies.
Markets seemed to recognize that nuance.
Equity futures initially dipped on the GDP miss but reversed as traders digested the shutdown distortion and the strength in private demand. The Dow held near recent highs, while S&P 500 futures stabilized into the close. On the rates side, the 10-year Treasury yield ticked modestly higher on the firmer-than-expected PCE print before settling back as investors weighed the transitory elements. The 30-year followed a similar arc.
The bottom line: this was not a stagflation report. It was a distorted growth print paired with a nuanced inflation signal.
Strip out the political shutdown artifact, and the data point to a private sector that remains resilient—and an economy better positioned for 2026 than many pundits are willing to admit.
