The US economy, as measured by GDP, expanded at its fastest pace in two years during the third quarter, fueled by resilient consumer and business spending alongside calmer trade policies compared to Q2. However, economists swiftly cautioned that this robust growth is unlikely to sustain through 2026, suggesting that while the GDP surge reinforces "soft landing" expectations, it doesn’t confirm the Federal Reserve’s desired economic stability.
According to the Bureau of Economic Analysis (BEA), the preliminary estimate of inflation-adjusted GDP grew at an annualized rate of 4.3% in Q3, significantly surpassing economists' consensus forecast of 3.3%. This follows Q2’s 3.8% growth, also driven by strong consumer spending. The BEA, which canceled its initial October 30 release due to the government shutdown, will now issue only two GDP revisions for Q3 instead of the usual three, with the next update likely serving as the final figure.
Following the report, US Treasury yields rose while major stock index futures extended losses, as robust consumer spending dampened expectations for aggressive Fed rate cuts in 2026. However, the "Goldilocks soft landing" narrative—moderate growth with stable inflation—remains intact.
**Strong GDP Growth, but Economists Warn Against Celebration** The delayed GDP report highlighted sustained momentum in consumer spending, which accounts for ~70% of GDP, supported by reduced punitive tariffs compared to Q2. While the government shutdown may weigh on Q4 growth, economists anticipate a mild rebound in 2026, aided by potential tax rebates and a possible Supreme Court ruling overturning broad global tariffs.
Federal Reserve Chair Jerome Powell echoed this outlook, citing supportive fiscal policy, strong AI data center investments by tech giants, and resilient consumer spending as key drivers for faster 2026 growth. The latest FOMC projections indicate only one rate cut in 2026 after three cuts this year, as inflation remains above the Fed’s 2% target. Core PCE inflation rose to 2.9% annualized in Q3, up from 2.6% in Q2.
**Consumer Spending Diverges Amid Labor Market Weakness** Consumer spending grew 3.5% annualized in Q3, exceeding expectations (2.7%), reflecting strong services demand (e.g., healthcare, travel) offset by weaker auto spending. However, a softer labor market and tariff-driven cost pressures may challenge consumers in 2026, exacerbating spending disparities: high-income households benefit from record stock markets, while middle- and lower-income groups pull back.
Business investment grew 2.8%, led by tech equipment and AI data center spending. Meanwhile, net exports added 1.6 percentage points to GDP after H1 volatility, while inventories and residential investment dragged on growth. Economists emphasized final domestic demand—up 3%, the largest gain in a year—as a clearer gauge of underlying economic strength.
**"Soft Landing" Strengthens, but Rate-Cut Expectations Cool** Morgan Stanley’s 2026 outlook projects a "Goldilocks" scenario: moderate growth, fading tariff-driven inflation, and tech-driven AI infrastructure investments. While Q3 GDP bolstered soft-landing hopes, rate futures traders pared back 2026 Fed cut expectations from three to two (likely in March and September), reflecting concerns over potential overheating.
KPMG Chief Economist Diane Swank noted, "This is the strongest six-month growth since late 2023, but it doesn’t feel that way. Consumers are spending, and data center investment is booming, yet job creation lags." Chris Rupkey of FwdBonds added, "This delayed report is old news—Q4 growth may stall, so there’s little to celebrate."
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