Month: February 2026

New Real GDP Data Shows that Growth Slowed Substantially in the Fourth Quarter … or Did It?

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Recent macro data had been showing relatively strong growth in output and steady growth in employment. This morning’s release of the initial estimate of real GDP growth for the fourth quarter of 2025 from the Bureau of Economic Analysis (BEA) was expected to show continuing solid growth. (The report can be found here.) Instead, the BEA estimates that real GDP increased in the fourth quarter by only 1.4 percent measured at an annual rate. Growth was down sharply from the 4.4 percent increase in the third quarter of 2025. Economists surveyed by the Wall Street Journal had forecast a 2.5 percent increase. The following figure shows the estimated rates of GDP growth in each quarter beginning with the first quarter of 2021.

As the following figure—taken from the BEA report—shows, the decline in real government expenditures of –0.90 percent at an annual rate was the most important factor contributing to the slowing growth in real GDP during the fourth quarter. The decline in government expenditures is largely attributable to the federal government shutdown, which lasted from October 1, 2025 to November 12, 2025.

As we’ve discussed in previous blog posts, to better gauge the state of the economy, policymakers—including Fed Chair Jerome Powell—often prefer to strip out the effects of imports, inventory investment, and government expenditures—which can be volatile—by looking at real final sales to private domestic purchasers, which includes only spending by U.S. households and firms on domestic production. As the following figure shows, real final sales to domestic purchasers increased by 2.4 percent at an annual rate in the fourth quarter, which was well above the 1.4 percent increase in real GDP and also above the U.S. economy’s expected long-run annual real growth rate of 1.8 percent. Note also that real final sales to private domestic purchasers grew by 2.9 percent in the third quarter, during which real GDP grew by 4.4 percent, and by 1.9 percent in the first quarter of 2025, when real GDP declined by 0.6 percent. So this measure of output is more stable and likely is a better indicator of the underlying growth rate in the economy than is growth in real GDP.

The BEA report this morning also included quarterly data on the personal consumption expenditures (PCE) price index. The Fed relies on annual changes in the PCE price index to evaluate whether it’s meeting its 2 percent annual inflation target. The following figure shows headline PCE inflation (the blue line) and core PCE inflation (the red line)—which excludes energy and food prices—for the period since the first quarter of 2019, with inflation measured as the percentage change in the PCE from the same quarter in the previous year. In the fourth quarter of 2025, headline PCE inflation was 2.8 percent, up slightly from 2.7 percent in the third quarter. Core PCE inflation in the third quarter was 2.9 percent, unchanged from the third quarter. Both headline PCE inflation and core PCE inflation remained above the Fed’s 2 percent annual inflation target.

The following figure shows quarterly PCE inflation and quarterly core PCE inflation calculated by compounding the current quarter’s rate over an entire year. Measured this way, headline PCE inflation increased to 2.9 percent in the fourth quarter of 2025, up from to 2.8 percent in the third quarter. Core PCE inflation fell to 2.7 percent in the fourth quarter of 2025 from 2.9 percent in the third quarter. Measured this way, both core and headline PCE inflation were also above the Fed’s target.

Today was also notable for a decision from the U.S. Supreme Court that invalidated some of the Trump administration’s tariff increases that began to be implemented in April 2025. President Trump announced this afternoon that he would impose a new 10 percent across-the-board tariff, relying on Section 122 of the Trade Act of 1974, rather than on the International Emergency Economic Powers Act (IEEPA), which the Supreme Court ruled today did not authorize presidents to unilaterally impose tariffs.

Today’s developments appeared unlikely to have much effect on the views of the members of the Fed’s policymaking Federal Open Market Committee (FOMC). The FOMC is unlikely to lower its target for the federal funds rate at its next meeting on March 17–18. The probability that investors in the federal funds futures market assign to the FOMC keeping its target rate unchanged at that meeting increased only slightly from 94.6 percent yesterday to 96.0 percent this afternoon.

CPI Inflation Comes in Lower than Expected

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There was good news this morning on inflation. (Although maybe not quite good enough to justify the exuberance of the people in the AI-generated image above!) The Bureau of Labor Statistics (BLS) released its report on the consumer price index (CPI) for January. The following figure compares headline CPI inflation (the blue line) and core CPI inflation (the red line). Because of the effects of the federal government shutdown, the BLS didn’t report inflation rates for October or November, so both lines show gaps for those months. (Today’s report was delayed two days by the recent brief government shutdown.)

  • The headline inflation rate, which is measured by the percentage change in the CPI from the same month in the previous year, was 2.4 percent in January, down from 2.7 percent in December. 
  • The core inflation rate, which excludes the prices of food and energy, was 2.5 percent in January, down from 2.6 percent in December. 

Headline inflation was lower than the forecast of economists surveyed by FactSet, while core inflation was at the forecast rate.

In the following figure, we look at the 1-month inflation rate for headline and core inflation—that is the annual inflation rate calculated by compounding the current month’s rate over an entire year. Calculated as the 1-month inflation rate, headline inflation (the blue line) was 2.1 percent in January, down from 3.6 percent in December. Core inflation (the red line) increased to 3.6 percent in January from 2.8 percent in December.

The 1-month and 12-month headline inflation rates are telling similar stories, with both measures indicating that the rate of price increase is running slightly above the Fed’s 2 percent inflation target. The 1-month core inflation rate shows inflation running well above the Fed’s target.

Of course, it’s important not to overinterpret the data from a single month. The figure shows that the 1-month inflation rate is particularly volatile. Also note that the Fed uses the personal consumption expenditures (PCE) price index, rather than the CPI, to evaluate whether it is hitting its 2 percent annual inflation target.

In recent months, there have been many media reports on how consumers are concerned about declining affordability. These concerns are thought to have contributed to Zohran Mamdani’s victory in New York City mayoral race. Affordability has no exact interpretation but typically means concern about inflation in goods and services that consumers buy frequently. 

Many consumers seem worried about inflation in food prices. The following figure shows 1-month inflation in the CPI category “food at home” (the blue bar)—primarily food purchased at groceries stores—and the category “food away from home” (the red bar)—primarily food purchased at restaurants. Inflation in both measures fell in January from the very high leves of December. Food at home increased 2.3 percent in January, down sharply from up from 7.8 percent in December. Food away from home increased 1.8 percent in January, also down sharply from 8.7 percent in December. Again, 1-month inflation rates can be volatile, but the deceleration in inflation in food prices would be a welcome development if it can be sustained in future months.

There was also good news in the falling price of gasoline. The following figure shows 1-month inflation in gasoline prices. In January the price of gasoline fell at an annual rate of 32.2 percent, after having fallen at an annual rate of 4.0 percent in December. As those values imply, 1-month inflation rates in gasoline are quite volatile.

The affordability discussion has also focused on the cost of housing. The price of shelter in the CPI, as explained here, includes both rent paid for an apartment or a house and “owners’ equivalent rent of residences (OER),” which is an estimate of what a house (or apartment) would rent for if the owner were renting it out. OER is included in the CPI to account for the value of the services an owner receives from living in an apartment or house. The following figure shows 1-month inflation in shelter. 

One-month inflation in shelter decreased to 2.7 percent in January from 4.7 in December, which is also good news if it can be sustained.

What effect have the tariffs that the Trump administration announced on April 2 had on inflation? (Note that many of the tariff increases announced on April 2 have since been reduced.) There has been a debate among policymakers and economists as to whether the full effects of tariff increases have already shown up in prices of final goods. In his press conference following the last meeing of the Fed’s Federal Open Market Committee (FOMC), Fed Chair Jerome Powell indicated that he believed that tariffs would cause further price increases later in the year:

“The U.S. economy has pushed right through [the tariff increases]. Partly that is—that the way that what was implemented was significantly less than what was announced at the beginning. In addition, other countries didn’t retaliate, and, in addition, a good part of it hasn’t been passed through to consumers yet. It’s being—it’s being taken by companies that stand between the consumer and the exporter.”

The following figure shows 12-month inflation in durable goods—such as furniture, appliances, and cars—which are likely to be affected directly by tariffs, and 12-month inflation in services, which are less likely to be affected by tariffs. In January, inflation in durable goods was 0.4 percent, down from 1.2 percent in December. Inflation in services was 3.2 percent in January, down slightly from 3.3 percent in December. So to this point, upward pressure on goods prices from the tariffs is not reflected in the most recent data.


It’s unlikely that this inflation report will have much effect on the views of the members of the FOMC. The FOMC is unlikely to lower its target for the federal funds rate at its next meeting on March 17–18. The probability that investors in the federal funds futures market assign to the FOMC keeping its target rate unchanged at that meeting declined only slightly from 91.6 percent yesterday to 90.2 percent after the release of today’s inflation report.

Healthcare Jobs Dominate Employment Growth in the United States

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It’s not surprising that employment in health care has been increasing. The National Health Expenditure (NHE) Projections Model of the Centers for Medicare & Medicaid Services estimates that the long-run income elasticity of demand for private personal health care spending is 1.58. So, a 10 percent increase in U.S. disposable personal income will result in the long run in a 15.8 percent increase in private personal health care spending. In other words, we would expect personal health care spending to become an increasing fraction of total household spending. In addition, the median age of the U.S. population has increased from 32.9 years in 1990 to a projected 40.1 years in 2025. As people age, their demand for health care increases. Finally, holding income and age constant, demand for health care has also increased as a result of the increasing effectiveness of medical care in treating disease.

Despite these long-run trends, it’s surprising how dependent increases in U.S. employment have become recently on the growth in health care jobs. The following figure shows monthly changes in a broad measure of health care employment (the blue bars) and in total nonfarm employment (the red bars), using data from the establishment survey from the Bureau of Labor Statistics (BLS). (This blog post yesterday discussed the latest “Employment Situation” report from the BLS.)

The values for January 2023 through December 2024 show what we might expect—the increase in total employment being significantly larger than the increase in health care employment. During this period, health care employment was about 48.5 percent of total employment. In other words, although health care employment was a key driver of increases in employment, non-health care employment was also steadily increasing. The situation since January 2025 is much different with health care employment increasing by 817,000, while total employment increased by only 311,000. In other words, since January 2025, employment outside of health care (again, broadly defined) has fallen by more than 500,000 jobs.

We can look at longer term trends in health care employment relative to employment in other industries. The following maps show the change over time in the industry with the most employment in each state, using data from the BLS’s “Quarterly Census of Employment and Wages.” The industries are grouped into four broad categories: manufacturing, retail trade, leisure and hospitality, and health care. (Industries are defined as follows using the North American Industry Classification System (NAICS): Manufacturing is NAICS 31–33, Retail trade is NAICS 44–45, Leisure and hospitality is NAICS 72, and health care is NAICS 62.)

In 1990, manufacturing was the largest source of private employment in most states, and in no state was health care the largest employer. By 2000, manufacturing was still the largest employer in 27 states, but health care had become the largest employer in 2 states. The results for 2024 are strikingly different: Manufacturing was no longer the largest employer in any state, and health care was the largest employer in 48 states—every state except for Hawaii and Nevada.

In 1990, almost twice as many people in the United States worked in manufacturing as worked in health care. In 2024, employment in health care was 80 percent greater than employment in manufacturing. And these trends are likely to continue. The BLS forecast in 2025 that 12 of the 20 fastest-growing occupations over the next 10 years will be in health care.

Surprisingly Strong Jobs Report Accompanied by a Large Downward Annual Benchmark Revision

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This morning (February 11), the Bureau of Labor Statistics (BLS) released its “Employment Situation” report (often called the “jobs report”) for January. The report was originally scheduled to be released last Friday but was postponed by the brief federal government shutdown. The data in the report show that the labor market was much stronger than expected in January. 

The jobs report has two estimates of the change in employment during the month: one estimate from the establishment survey, often referred to as the payroll survey, and one from the household survey. As we discuss in Macroeconomics, Chapter 9, Section 9.1 (Economics, Chapter 19, Section 19.1), many economists and Federal Reserve policymakers believe that employment data from the establishment survey provide a more accurate indicator of the state of the labor market than do the household survey’s employment data and unemployment data. (The groups included in the employment estimates from the two surveys are somewhat different, as we discuss in this post.)

According to the establishment survey, there was a net increase of 130,000 nonfarm jobs during January. This increase was well above the increase of 55,000 that economists surveyed by the Wall Street Journal had forecast.  Economists surveyed by Bloomberg had a higher forecast of 65,000 net jobs. The BLS revised downward its previous estimates of employment in November and December by a combined 17,000 jobs. (The BLS notes that: “Monthly revisions result from additional reports received from businesses and government agencies since the last published estimates and from the recalculation of seasonal factors.”)

The following figure from the jobs report shows the net change in nonfarm payroll employment for each month in the last two years. The increase in net jobs in January was the largest since December 2024.

The unemployment rate, which is calculated from data in the household survey, fell from 4.4 percent in December to 4.3 percent in January. As the following figure shows, the unemployment rate has been remarkably stable over the past year and a half, staying between 4.0 percent and 4.4 percent in each month since May 2024. The Federal Open Market Committee’s current estimate of the natural rate of unemployment—the normal rate of unemployment over the long run—is 4.2 percent. So, unemployment is slightly above the natural rate. (We discuss the natural rate of unemployment in Macroeconomics, Chapter 9 and Economics, Chapter 19.)

As the following figure shows, the monthly net change in jobs from the household survey moves much more erratically than does the net change in jobs from the establishment survey. As measured by the household survey, there was a net increase of 528,000 in January, far above the increase in jobs from the payroll survey. (Note that because of last year’s shutdown of the federal government, there are no data for October or November.) In any particular month, the story told by the two surveys can be inconsistent. In this case, both surveys indicate unexpectedly strong job growth, with the increase in household employment being particularly strong. (In this blog post, we discuss the differences between the employment estimates in the two surveys.)

The household survey has another important labor market indicator: the employment-population ratio for prime age workers—those workers aged 25 to 54. In January the ratio was 80.9 percent, the highest since September 2024. In addition to matching the recent highs reached in mid-2024, the prime-age employment-population ratio is above what the ratio was in any month since April 2001. The continued high levels of the prime-age employment-population ratio indicates some continuing strength in the labor market.

The Trump Administration’s layoffs of some federal government workers are clearly shown in the estimate of total federal employment for October, when many federal government employees exhausted their severance pay. (The BLS notes that: “Employees on paid leave or receiving ongoing severance pay are counted as employed in the establishment survey.”) As the following figure shows, there was a decline federal government employment of 166,000 in October, with additional declines in the following three months. The total decline in federal government employment since the beginning of February 2025 is 324,000.

The establishment survey also includes data on average hourly earnings (AHE). As we noted in this post, many economists and policymakers believe the employment cost index (ECI) is a better measure of wage pressures in the economy than is the AHE. The AHE does have the important advantage of being available monthly, whereas the ECI is only available quarterly. The following figure shows the percentage change in the AHE from the same month in the previous year. The AHE increased 3.7 percent in January, the same as in December.

The following figure shows wage inflation calculated by compounding the current month’s rate over an entire year. (The figure above shows what is sometimes called 12-month wage inflation, whereas this figure shows 1-month wage inflation.) One-month wage inflation is much more volatile than 12-month wage inflation—note the very large swings in 1-month wage inflation in April and May 2020 during the business closures caused by the Covid pandemic. In January, the 1-month rate of wage inflation was 5.0 percent, up from 0.7 percent in December. This increase in wage growth may be an indication of a strengthening labor market. But one month’s data from such a volatile series may not accurately reflect longer-run trends in wage inflation.

In today’s jobs report, the BLS also included its final annual benchmark revision to the establishment employment data. (We discussed the preliminary annual revision in this blog post last September.) The following table from the jobs report indicates that the revision was quite substantial. The revised estimate of payroll employment is 1,029,000 jobs lower than the original estimate. The increase in total nonfarm employment in 2025 was revised down to only 181,000 from the original estimate of 584,000. Leaving aside the collapse in employment in 2020 during the Covid pandemic, job growth in 2025 was the slowest since 2010 in the immediate aftermath of the Great Recession of 2007–2009.

Despite the large downward revision to job growth in 2025, the strong job growth for January in today’s jobs report makes it unlikely that the Federal Reserve’s policymaking Federal Open Market Committee (FOMC) will lower its target for the federal funds rate at its next meeting on March 17–18. The probability that investors in the federal funds futures market assign to the FOMC keeping its target rate unchanged at that meeting jumped from 79.9 percent yesterday to 92.1 percent after the release of today’s jobs report.

December JOLTS Report Shows Possible Labor Market Weakening

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Today (February 5), the Bureau of Labor Statistics (BLS) released its “Job Openings and Labor Turnover” (JOLTS) report for December 2025. The report indicated that labor market conditions may be weakening. The following figure shows that the rate of job openings fell to 3.9 percent in December from 4.2 percent in November. The rate was 4.5 percent in October. The job openings rate is the lowest since April 2020, at the start of the Covid pandemic. We should note the usual caveat that the monthly JOLTS data is subject to potentially large revisions as the BLS receives more complete data.

(The BLS defines a job opening as a full-time or part-time job that a firm is advertising and that will start within 30 days. The rate of job openings is the number of job openings divided by the number of job openings plus the number employed workers, multiplied by 100.)

In the following figure, we show a measure of the state of the labor market that economists frequently use: the total number of job openings to the total number of people unemployed. In December there were 0.87 job openings per unemployed person, the lowest value for that measure since March 2021, during the recovery from the pandemic. The value was 1.0 in September. (Note that data for October and November are unavailable because the data weren’t collected during the shutdown of the federal government from October 1 to November 12 last year.) The value for December is well below the 1.21 job openings per employed person in February 2020, just before the pandemic. (Note that, as we discussed in this blog post, the employment-population ratio for prime age workers, which many economists consider a key measure of the state of the labor market, rose in December, putting it above what the ratio was in any month during the period from January 2008 to February 2020.)

The rate at which workers are willing to quit their jobs is an indication of how they perceive the ease of finding a new job. As the following figure shows, the quit rate declined slowly from a peak of 3 percent in late 2021 and early 2022 to 2.0 percent in August 2024, the same value as in December 2025. That rate is below the rate during 2019 and early 2020. By this measure, workers’ perceptions of the state of the labor market have remained remarkably stable over the last year and a half.

Overall, this JOLTS report is consistent with what some economists have labeled a “slow hire, slow fire” labor market. Fed Chair Jerome Powell’s remarks at his press conference following the last meeting of the Federal Open Market Committee (FOMC) indicates that Fed policymakers share this view, which Powell believes complicates monetary policymaking:

“So there are lots of … little places that suggest that the labor market has softened, but part of … payroll job softening is that both the supply and demand for labor has come down … growth in those two have come down. So that makes it a difficult time to read the labor market. So, imagine they both came down a lot, to the point where there is no job growth. Is that full employment? In a sense it is. If demand and supply are … in balance, you could say that’s full employment. At the same time, is it—do we really feel like … that’s a maximum employment economy? It’s a challenging—it’s very challenging and quite unusual situation.”

The BLS was scheduled to release its monthly “Employment Situation” report (often called the “jobs report”) for January 2026 tomorrow. Because of the temporary lapse in funding that began Saturday, the report will instead be released next Wednesday, February 11. That report will provide additional data on the state of the labor market. (Note that the data in the JOLTS report lag the data in the “Employment Situation” report by one month.)