By Nicole Goodkind and Megan Leonhardt
The U.S. economy grew at its fastest pace in two years in the third quarter, far exceeding economists' expectations and calling attention to a widening gap between strong output and a cooling labor market.
Inflation-adjusted gross domestic product expanded at an annualized rate of 4.3% from July through September, according to an initial estimate released Tuesday by the Bureau of Economic Analysis. The report, delayed by the recent government shutdown, far exceeded the 3% growth economists surveyed by FactSet had expected.
Growth accelerated from a 3.8% pace in the second quarter and marked the strongest expansion since the third quarter of 2023, when GDP grew at a 4.7% rate. Excluding more volatile trade and inventory components, real final sales to private domestic purchasers rose 3%, a measure economists use to gauge underlying demand.
The strong headline figure was driven by faster consumer spending, stronger exports, higher government outlays, and a smaller drag from investment and imports. Much of that upside, however, reflected unusual trade dynamics tied to President Donald Trump's tariff renegotiations, which pushed imports lower and exports higher during the quarter.
GDP "was boosted over a percentage point by the weird trade situation," said Heather Long, chief economist at Navy Federal Credit Union. "Artificially low imports and high exports did make GDP look better."
Economists cautioned that the scale and composition of the third quarter's growth are unlikely to be sustained. Oliver Allen, senior U.S. economist at Pantheon Macroeconomics, said the 1.6 percentage point contribution from net trade was unusually large and is likely to reverse, either through downward revisions to GDP or a larger drag from inventories in coming quarters.
That reliance on trade-driven demand raises questions about how durable the strength will prove. Long said the economy currently looks closer to a 2.5% to 3% growth environment, adding that the outlook depends heavily on Americans holding on to their jobs and layoffs not accelerating.
The labor market is showing signs of strain. The most recent jobs report from the Bureau of Labor Statistics showed payroll growth slowing, while the unemployment rate ticked up to its highest level in more than two years. The divergence shows an expansion that is delivering strong output without translating into job creation.
That pattern is often referred to as a K-shaped expansion, with spending concentrated among higher income households and investment tilted toward capital-intensive sectors such as technology. Economists say those dynamics support growth but generate relatively few new jobs.
Still, consumer spending, which accounts for nearly 70% of economic output, grew at an annualized pace of 3.5%, led by increases in healthcare and international travel. Business investment rose 2.8%, driven by spending on equipment and intellectual property, while residential investment declined for a third straight quarter.
"The TARIFFS are responsible for the GREAT USA Economic Numbers JUST ANNOUNCED...AND THEY WILL ONLY GET BETTER!" wrote President Trump on social media following the release of the report on Tuesday morning.
Treasury yields jumped on the data, with the two-year note rising to 3.52% and the 10-year climbing to 4.18%. The S&P 500 was little changed.
The result came in well above even the most optimistic forecasts. The Atlanta Fed's GDPNow model had estimated growth of 3.5%, while the New York Fed's NowCast projected a much softer 2.3% pace.
Tuesday's report also included inflation readings for the quarter. Personal consumption expenditures prices rose 2.8%, up from 2.1% in the second quarter. Core PCE inflation increased to 2.9% from 2.6%.
For Federal Reserve officials, the data reinforce a difficult balancing act. Growth remains strong and underlying demand firm, but inflation is still running well above the Fed's 2% target and labor market conditions are softening. Economists at Citigroup said on Tuesday that the upside surprise does little to alter the central bank's policy outlook, though the divergence between solid growth and weaker hiring could sharpen divisions among policymakers.
Risks are also mounting for the fourth quarter. Allen said recent data point to a slowdown in consumer spending, as weaker hiring, stagnant real incomes, and the exhaustion of pandemic-era excess savings begin to weigh on households. Pantheon expects headline growth to slow to around 0.5% to 1% in the final quarter of the year.
The government shutdown, which began October 1 and lasted through mid-November, is also expected to weigh on fourth quarter activity, alongside continued tariff uncertainty and tight monetary policy.
While the shutdown delayed the release of third quarter GDP, the BEA has said it didn't materially affect measurement of economic activity during the period, though some source data were estimated because of reporting delays.
--Connor Smith contributed to this article.
Write to Nicole Goodkind at nicole.goodkind@barrons.com and Megan Leonhardt at megan.leonhardt@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
December 23, 2025 11:25 ET (16:25 GMT)
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