Weekly Economic Report 2.20.26

The US economy ground to a near halt with 1.4% growth in the fourth quarter – or did it? Actually, no. The economy continued to grow at a robust pace – but major distortions in the federal government sector, likely associated with the shutdown, led to the weak report. In fact, private sector real GDP grew at a solid 2.8% annual rate – right in line with the average of the past three quarters under Trump, and the previous ten under Biden. The private sector deflator was 3.0%, again exactly the same as the last three and thirteen quarters. Hmm…. Seems like nothing much changed – so why the 1.4% headline with 3.6% inflation? Because real GDP for the federal government sector fell by -16.6%, with a -3.5% drop in nominal growth and an 11.9% inflation rate. Is that accurate? We really don’t care, as it will not affect actual future government spending -- which was passed to end the government shutdown. We expect a significant snapback in the first quarter of 2026, with federal government adding at least a point (we do have another modest shutdown to deal with), so we start at 3.8% -- well above GDPNow’s 3.1%, which basically has no government pop.

EU02-20-2026.pdf

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