In a surprising turn, the U.S. economy expanded at a 4.3% annual rate in the third quarter, the fastest growth in two years, driven by resilient consumer spending despite persistent inflation.
GDP Growth
The Commerce Department reported that gross domestic product from July through September rose from a 3.8% growth rate in the April-June quarter. Economists surveyed by FactSet had forecast only 3% growth for the period.
Consumer Spending
Consumer spending, which makes up about 70% of U.S. economic activity, accelerated to a 3.5% annual pace last quarter, up from 2.5% in the April-June period. As Stephen Stanley, chief U.S. economist at Santander, noted, “The jump in consumer spending reminds me a lot of last year’s (fourth quarter),” said Stephen Stanley, chief U.S. economist at Santander. “Consumers were stretching. So, as was the case entering this year, households probably need to take a breather soon.”
Inflation
Inflation remains above the Federal Reserve’s 2% target. The Fed’s preferred gauge, the personal consumption expenditures index (PCE), climbed to a 2.8% annual pace last quarter, up from 2.1% in the second quarter. Core PCE inflation, excluding food and energy, rose to 2.9% from 2.6% in the April-June quarter.
AI Investment
Investment in intellectual property, which covers AI, grew 5.4% in the third quarter, following a 15% jump in the second quarter and a 6.5% rise in the first quarter.
Government Spending
Consumption and investment by the government grew 2.2% in the quarter after contracting 0.1% in the second quarter. The increase was driven by higher state and local expenditures and federal defense spending.
Private Business Investment
Private business investment fell 0.3% in the third quarter, led by declines in housing and non-residential building investment. The decline was much smaller than the 13.8% slide seen in the second quarter.
Underlying Strength
A core measure of the economy’s underlying strength grew at a 3% annual rate from July through September, slightly up from 2.9% in the second quarter. This category includes consumer spending and private investment but excludes volatile items such as exports, inventories and government spending.
Trade
Exports grew at an 8.8% rate, while imports, which subtract from GDP, fell 4.7%.
Labor Market
The government reported that the U.S. economy added 64,000 jobs in November but lost 105,000 in October. The unemployment rate rose to 4.6% last month, the highest since 2021. Since March, job creation has averaged 35,000 a month, compared with 71,000 in the year ending March. Fed Chair Jerome Powell said those numbers may be revised lower.
Federal Reserve Policy
The Fed cut its benchmark lending rate three times in a row to close out 2025, largely out of concern for a labor market that has steadily lost momentum since spring. Chris Zaccarelli, chief investment officer for Northlight Asset Management, said, “If the economy keeps producing at this level, then there isn’t as much need to worry about a slowing economy,” adding that inflation could return as the greatest threat to the economy.
Outlook
The report is the first of three estimates the government will make of GDP growth for the third quarter. Analysts warn that the extended government shutdown dragging on the economy in the fourth quarter and a growing number of Americans fatigued by high inflation could temper the current growth spurt.
Key Takeaways
- U.S. GDP grew 4.3% annually in Q3, the fastest pace in two years.
- Consumer spending rose to 3.5% annual pace, a 1% jump from Q2.
- AI investment grew 5.4% in Q3, following a 15% rise in Q2.
The third-quarter data underscore a robust economy driven by consumers and technology, but persistent inflation and labor market uncertainties hint at potential headwinds ahead.
