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- US economic growth accelerated in Q3, beating expectations as strong consumer spending led to the expansion.
- Inflation persisted, with higher-income households benefiting most, while rising living costs strained lower income Americans.
The US economy showed resiliency in Q3, as the delayed GDP report indicated that the economy grew at its strongest and fastest pace in two years. The Q3 GDP report was previously delayed due to the prior government shutdown that started in October.
Key Drivers of Growth
The US GDP for Q3 came in at 4.3%, way higher than analysts’ estimates at 3.3%, with strong consumer spending leading the way, coming in at 3.5%, up from Q2’s 2.5% figure. Household spending grew more on goods and services, alongside recreational items. ⁽¹⁾
Increases in exports and government spending also boosted growth, while a smaller dip in private fixed investment helped as well. Growth also came from massive investments in artificial intelligence.
Trade played a big role. A smaller trade deficit added about 1.6% to GDP, thanks to rising exports and falling imports. Only inventories and residential spending, which include homebuilding and sales, slowed in growth. Corporate profits jumped by $166.1 billion, or 4.2%, way higher than the small gain in Q2. ⁽²⁾
Inflation and Uneven Recovery
Despite strong growth, inflation remained high, with the latest core PCE index coming in at 2.9%, still above the Federal Reserve’s 2% target and higher than Q2’s figure.
The economy is showing a K-shape pattern, showing that high income consumers are gaining and spending more money while lower income households are struggling financially. ⁽³⁾
Higher-income households and large companies drove most of the gains, with gains coming from stock market rises and surging house prices.
Lower income households struggled with rising food and utility prices. Economists have tied some of these issues to Trump’s tariff policies, which raised import costs. ⁽⁴⁾
Market Reaction and Outlook
Markets traded in mixed territory, with the S&P 500 rising slightly, while the US dollar continued its path downwards. Gold extended gains to new record highs around $4,480.
Economists expect slower growth in Q4. The government shutdown has led to a downgrade in the GDP forecast to 1-2% due to rising living costs. ⁽⁵⁾
President Trump praised the report, crediting his tariffs for the strong numbers. However, many economists say tariffs have added to inflation pressures and leaving Americans unable to afford basic needs.
