GDP Slashed to 0.7% in Revision That Blindsided Wall Street

The 0.7 percentage point downward revision — from 1.4% to 0.7% — was the largest negative GDP revision since the pandemic era. The Bureau of Economic Analysis attributed it to downward adjustments in consumer spending, government expenditures, and exports. A smaller decline in imports, which subtract from GDP, also contributed.

Consumer spending, the economy's engine, grew just 2.0% in Q4, revised down 0.4 percentage points from the prior estimate. The pullback came primarily from services, specifically healthcare spending. That's a worrying signal: consumers aren't just cutting discretionary purchases, they're scaling back on essentials.

For the full year, GDP posted 2.1% growth — a tenth of a point lower than previously reported and a meaningful step down from 2024's 2.8% pace. The trajectory is clear: Q3's 4.4% growth now looks like the anomaly, not the trend.

The personal consumption expenditures price index rose 0.3% in January, putting the annual rate at 2.8%. Strip out food and energy, and core PCE jumped 0.4% month-over-month — the hottest monthly reading since early 2024 — pushing the 12-month rate to 3.1%.

That 3.1% core figure is 1.1 percentage points above the Fed's 2% target. It's also accelerating: December's reading was 3.0%. The Fed watches core PCE more closely than CPI because it captures a broader basket of spending and adjusts for substitution effects.

"The inflation picture wasn't looking good even before the Middle East crisis," said Sonu Varghese, chief macro strategist at Carson Group. "An already large headache for the Federal Reserve is going to turn into an even larger one, and it's likely the Fed will not cut rates in 2026 and may even start talking about rate hikes later this year."

A separate Commerce Department report showed orders for long-lasting goods — transportation equipment, appliances, computers — were flat in January. Economists had expected a 1.3% gain. Excluding transportation, orders rose a modest 0.4%.

The durable goods miss adds another data point to the slowdown narrative. Businesses aren't investing aggressively, consumers are pulling back, and government spending contributed less than estimated. The demand proxy that Fed officials watch closely — private sales to private domestic purchasers — grew just 1.9% in Q4, revised down half a percentage point and a full point below Q3.

"The big downward revision in GDP is a gut check going into this energy crunch, increasing the risk of stagflation," said David Russell, global head of market strategy at TradeStation. "The soft January durable goods data also suggests the economy entered this crisis weaker than hoped."