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The U.S. economy expanded at a robust 4.3% annual rate in the third quarter, its fastest growth in two years, powered by stronger consumer spending, increased government outlays and a rebound in exports, the Commerce Department reported Tuesday.
Gross domestic product — the total value of goods and services produced across the economy — accelerated from a 3.8% pace in the April-to-June quarter. Economists surveyed by FactSet had expected growth closer to 3%.
The report, delayed by a recent government shutdown, paints a picture of an economy that remains resilient despite elevated interest rates and a cooling labor market. But it also highlights a renewed inflation problem that could complicate the Federal Reserve’s plans for further interest rate cuts.
Inflation pressures resurface
Inflation, as measured by the Fed’s preferred gauge — the personal consumption expenditures price index — rose at a 2.8% annual pace in the third quarter, up from 2.1% in the previous quarter.
Excluding volatile food and energy prices, core PCE inflation climbed to 2.9%, compared with 2.6% in the second quarter. Both readings remain above the Fed’s 2% target.
Economists warned that stronger growth combined with firmer inflation could make policymakers more cautious about easing monetary policy further.
“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 at Northlight Asset Management. “Inflation could return as the dominant concern.”
U.S. stock markets edged lower in thin holiday trading following the release, reflecting growing uncertainty about whether the Fed will cut rates again as soon as January.
Consumers and government spending drive growth
Consumer spending — which accounts for roughly 70% of U.S. economic activity — rose at a 3.5% annual rate from July through September, up from 2.5% in the prior quarter.
Government consumption and investment grew 2.2%, rebounding from a slight contraction in the spring. The increase was driven by higher state and local spending and increased federal defense outlays.
Private business investment declined 0.3%, weighed down by reduced spending on housing and nonresidential structures such as offices and warehouses. That decline was far smaller than the 13.8% drop recorded in the second quarter.
A measure of the economy’s underlying strength — which includes consumer spending and private investment but excludes government spending, inventories and trade — grew at a 3% annual rate, slightly faster than the previous quarter.
Trade boosts GDP
Exports surged at an 8.8% annual pace in the third quarter, while imports fell 4.7%. Because imports subtract from GDP, the trade figures provided a notable lift to overall growth.
Tuesday’s release is the first of three estimates the government will publish for third-quarter GDP.
Growth continues despite higher rates
Outside of the first quarter — when the economy briefly contracted as businesses rushed to import goods ahead of President Donald Trump’s tariff rollout — economic growth has remained steady.
That resilience has persisted even after the Federal Reserve sharply raised borrowing costs in 2022 and 2023 to combat inflation that followed the post-pandemic rebound.
Although inflation remains elevated, the Fed cut its benchmark interest rate three times toward the end of 2025, citing concerns about a labor market that has steadily lost momentum.
Labor market shows signs of cooling
The government reported last week that the economy added 64,000 jobs in November after losing 105,000 in October. The unemployment rate rose to 4.6%, the highest level since 2021.
Economists describe the labor market as being in a “low hire, low fire” phase, as businesses remain cautious amid uncertainty over tariffs and the lingering effects of high interest rates.
Since March, job growth has averaged just 35,000 per month, down from 71,000 in the year that ended in March. Federal Reserve Chair Jerome Powell has suggested those figures could be revised lower.
Outlook uncertain
While the third-quarter data underscore the economy’s continued strength, economists say the combination of firmer inflation and slower job growth leaves the outlook uncertain — and puts the Fed in a difficult position as it weighs whether to cut rates further in early 2026.
