US economy grows strong in third-quarter but uncertainty remains

The US economy grew at a surprisingly strong 4.3 per cent annual rate in the third quarter, the most rapid expansion in two years, driven by consumers who continue to spend in the face of ongoing inflation.

US gross domestic product from July through September – the economy’s total output of goods and services – rose from its 3.8 per cent growth rate in the April–June quarter, the Commerce Department said on Tuesday in a report delayed by the government shutdown. Economists surveyed by the data firm FactSet forecast growth of just 3.0 per cent in the period.

As has been the case for most of this year, the consumer is providing the fuel that is powering the US economy. Consumer spending, which accounts for about 70 per cent of US economic activity, rose to a 3.5 per cent annual pace last quarter. That is up from 2.5 per cent in the April–June period.

A number of economists, however, believe the growth spurt may be short-lived with the extended government shutdown dragging on the economy in the fourth quarter, as well as a growing number of Americans fatigued by stubbornly high inflation.

A survey published by the Conference Board on Tuesday showed that consumer confidence slumped close to levels not seen since the US rolled out broad tariffs on its trading partners in April.

“The jump in consumer spending reminds me a lot of last year’s [fourth quarter],” said Stephen Stanley, chief US economist at Santander. “Consumers were stretching. So, as was the case entering this year, households probably need to take a breather soon.”

However, at least in recent years, consumer spending has held up even when data suggests they have grown more anxious about money.

Tuesday’s GDP report also showed that inflation remains higher than the Federal Reserve would like. The Fed’s favoured inflation gauge – called the personal consumption expenditures index, or PCE – climbed to a 2.8 per cent annual pace last quarter, up from 2.1 per cent in the second quarter.

Excluding volatile food and energy prices, so-called core PCE inflation was 2.9 per cent, up from 2.6 per cent in the April–June quarter.

Economists say that persistent and potentially worsening inflation could make a January interest rate cut from the Fed less likely, even as central bank officials remain concerned about a slowing labour market.

“If the economy keeps producing at this level, then there isn’t as much need to worry about a slowing economy,” said Chris Zaccarelli, chief investment officer for Northlight Asset Management, adding that inflation could return as the greatest threat to the economy.

Another consistent driver in the US economy, spending on artificial intelligence, was also evident in the latest data.

Investment in intellectual property, the category that covers AI, grew 5.4 per cent in the third quarter, following an even bigger jump of 15 per cent in the second quarter. That figure was 6.5 per cent in the first quarter.

Consumption and investment by the government grew by 2.2 per cent in the quarter after contracting 0.1 per cent in the second quarter. The third-quarter figure was boosted by increased expenditures at the state and local levels and federal government defence spending.

Private business investment fell 0.3 per cent, led by declines in investment in housing and in non-residential buildings, such as offices and warehouses. However, that decline was much less than the 13.8 per cent slide in the second quarter.

Within the GDP data, a category that measures the economy’s underlying strength grew at a 3 per cent annual rate from July through September, up slightly from 2.9 per cent in the second quarter. This category includes consumer spending and private investment, but excludes volatile items like exports, inventories and government spending.

Exports grew at an 8.8 per cent rate, while imports, which subtract from GDP, fell another 4.7 per cent. Tuesday’s report is the first of three estimates the government will make of GDP growth for the third quarter of the year.

Outside of the first quarter, when the economy shrank for the first time in three years as companies rushed to import goods ahead of President Donald Trump’s tariff roll-out, the US economy has continued to expand at a healthy rate. That is despite much higher borrowing rates the Fed imposed in 2022 and 2023 in its drive to curb the inflation that surged as the United States bounced back with unexpected strength from the brief but devastating COVID-19 recession of 2020.

Though inflation remains above the Fed’s 2 per cent target, the central bank cut its benchmark lending rate three times in a row to close out 2025, mostly out of concern for a job market that has steadily lost momentum since spring.

Last week, the government reported that the US economy gained a healthy 64,000 jobs in November but lost 105,000 in October. Notably, the unemployment rate rose to 4.6 per cent last month, the highest since 2021.

The country’s labour market has been stuck in a ‘low hire, low fire’ state, economists say, as businesses stand pat due to uncertainty over Trump’s tariffs and the lingering effects of elevated interest rates. Since March, job creation has fallen to an average 35,000 a month, compared to 71,000 in the year ended in March. Fed Chair Jerome Powell has said that he suspects those numbers will be revised even lower.

AP