US economy expands at a surprisingly strong 4.3% annual rate in the third quarter

The U.S. economy expanded at a surprisingly robust 4.3% annual rate in the third quarter, marking its strongest growth in two years and surpassing analysts’ expectations of 3%, according to Commerce Department data released Tuesday. The report, delayed due to the government shutdown, shows significant increases in consumer spending, government expenditures, and exports.

Consumer spending, which accounts for approximately 70% of U.S. economic activity, accelerated to a 3.5% annual pace last quarter, up from 2.5% in the April-June period. Government consumption and investment grew by 2.2% after contracting slightly in the previous quarter, bolstered by increased state and local expenditures along with federal defense spending.

“If the economy keeps producing at this level, then there isn’t as much need to worry about a slowing economy,” noted Chris Zaccarelli, chief investment officer for Northlight Asset Management. However, he cautioned that inflation could once again become the primary economic concern.

The GDP report reveals worrying inflation trends that could complicate the Federal Reserve’s interest rate decisions. The Fed’s preferred inflation gauge—the personal consumption expenditures (PCE) index—rose to 2.8% annually, up from 2.1% in the previous quarter. Core PCE inflation, which excludes volatile food and energy prices, increased to 2.9% from 2.6%.

These persistent inflationary pressures may reduce the likelihood of another interest rate cut in January, even as the Fed remains concerned about labor market conditions. Following the GDP report’s release, U.S. markets turned lower during the holiday trading week, reflecting growing skepticism about an imminent rate reduction.

The strong economic performance appears even more impressive considering the high borrowing costs implemented by the Federal Reserve in 2022 and 2023 to combat post-pandemic inflation. Despite these measures, the U.S. economy has continued to expand at a healthy rate, with only one quarterly contraction since the COVID-19 recovery began.

Private business investment showed signs of stabilization, falling just 0.3% in the third quarter compared to a steep 13.8% decline in the second quarter. This category was weighed down by reduced investment in housing and nonresidential buildings such as offices and warehouses.

Export growth was particularly strong at 8.8%, while imports, which subtract from GDP calculations, fell by 4.7%. A measure that tracks the economy’s underlying strength—including consumer spending and private investment but excluding volatile components—grew at a solid 3% annual rate, slightly higher than the previous quarter’s 2.9%.

The labor market presents a more complicated picture. Recent government data shows the U.S. economy gained 64,000 jobs in November but lost 105,000 in October, with unemployment rising to 4.6% last month—the highest rate since 2021. Economists describe the current labor market as being in a “low hire, low fire” state, with businesses reluctant to make staffing changes amid uncertainty over potential Trump tariffs and lingering effects of high interest rates.

Since March, monthly job creation has averaged just 35,000 compared to 71,000 in the year ended in March. Federal Reserve Chair Jerome Powell has suggested these figures may be revised even lower.

Tuesday’s GDP report represents the first of three estimates the government will make for third-quarter economic growth. The robust performance, while encouraging, comes with significant caveats regarding inflation and employment that will likely influence Federal Reserve policy in the coming months.