The US economy likely expanded at a solid pace in the third quarter, driven by robust consumer spending and business investment. However, momentum appears to have weakened due to rising living costs and the recent government shutdown.
The Commerce Department will release preliminary Q3 GDP data on Tuesday, which is also expected to show reduced imports helped support economic growth by narrowing the trade deficit. Accelerated consumer spending was partly fueled by electric vehicle purchases ahead of the September 30 expiration of tax credits.
The delayed data release, caused by the 43-day government shutdown, may confirm what economists call a "K-shaped recovery" - high-income households thriving while middle- and lower-income families struggle. Surveys indicate consumer spending, the economy's main driver, is being sustained by affluent households benefiting from stock market gains.
Economists note large corporations have largely absorbed cost increases from Trump's widespread tariffs while investing heavily in AI, strengthening economic fundamentals. Small businesses, however, have borne the brunt of the impact.
"This was a good quarter, but it's unsustainable in Q4," said Brian Bethune, economics professor at Boston College. "Household budgets are being squeezed, with typical families barely breaking even in terms of real wage growth."
Reuters' economist survey estimates Q3 GDP grew at a 3.3% annualized rate, down from Q2's 3.8% expansion. The Bureau of Economic Analysis will also release preliminary corporate profits and Gross Domestic Income data.
The nonpartisan Congressional Budget Office estimates the government shutdown could reduce Q4 GDP by 1.0-2.0 percentage points, with $7-14 billion in permanent losses.
Consumer spending, accounting for over two-thirds of US economic activity, likely accelerated from Q2's 2.5% growth. Beyond EV purchases, services including air travel and hotels contributed to the increase.
A Bank of America Institute report shows low-income households are living paycheck-to-paycheck, allocating more budgets to groceries while cutting restaurant spending. They've also reduced clothing and travel expenditures, reflecting limited substitution options amid high inflation. Meanwhile, high-income households increased spending on dining, travel and entertainment.
Trump's trade policies have raised prices on some imports, exacerbating what economists call an "affordability crisis" that's hurting his approval ratings. Households also face higher utility bills due to increased power demand from AI and data center expansion, with health insurance premiums set to spike for some Americans in 2026.
Q3 inflation likely accelerated, with the PCE price index - one of the Fed's inflation gauges - expected to rise 2.8% versus Q2's 2.1%. The Fed recently cut rates by 25 basis points to 3.50%-3.75% but signaled no further near-term reductions pending clearer labor market and inflation trends.
Business investment likely contributed to GDP growth, reflecting strong AI-related equipment and intellectual property spending, though construction investment may have contracted for a seventh straight quarter.
"While data center construction booms, falling oil prices reducing rig counts likely dragged on commercial building investment," said Bernard Yaros, chief US economist at Oxford Economics.
A narrower trade deficit may have boosted growth, with tariff-induced import volatility creating unusually large GDP impacts. Economists disagree on inventory and government spending effects - some expect modest contributions while others see neutral inventory impacts. Residential investment likely contracted for a third straight quarter amid higher mortgage rates and construction costs from material tariffs.
"The AI boom is masking trade war damage," said Sal Guatieri, senior economist at BMO Capital Markets. "Q4 growth will slow further from the shutdown before rebounding next year."
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