US economy grows at robust 4.3% annual pace in third quarter

The U.S. economy expanded at a faster-than-expected 4.3% annual rate in the third quarter, its strongest performance in two years, driven by resilient consumer spending, higher government outlays and a sharp rise in exports. The data, released by the Commerce Department, point to continued economic momentum even as inflation remains above the Federal Reserve’s target and clouds the outlook for interest rate cuts.

The increase in gross domestic product from July through September marked an acceleration from a 3.8% pace in the previous quarter and exceeded the 3% growth forecast by economists surveyed by FactSet. The report, issued by the Commerce Department, was delayed by the recent U.S. government shutdown.

While growth surprised to the upside, the figures also underscored a key challenge for policymakers: inflation pressures strengthened again during the quarter, complicating the Federal Reserve’s efforts to balance price stability with a cooling labor market.

Inflation trends and policy implications

The Fed’s preferred inflation gauge, the personal consumption expenditures price index, rose at a 2.8% annual rate in the third quarter, up from 2.1% in the April–June period. Core PCE inflation, which strips out volatile food and energy prices, climbed to 2.9% from 2.6% previously.

Those readings remain above the central bank’s 2% target and have prompted economists to reassess expectations for near-term interest rate cuts. Some analysts now see a reduced likelihood that the Fed will ease policy early next year if growth and inflation continue at current levels.

“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. He added that inflation could once again become the dominant concern for markets and policymakers.

Financial markets reacted cautiously to the data. During a typically quiet holiday trading week, U.S. stock indexes edged lower after the GDP release, reflecting investor doubts that the Federal Reserve will deliver another rate cut in the near term.

Consumers remain the main engine

Consumer spending, which accounts for roughly 70% of U.S. economic activity, remained the primary driver of growth. Household outlays increased at a 3.5% annual rate in the third quarter, up from 2.5% in the previous period, supported by steady wage gains and continued demand for services.

Government consumption and investment also contributed positively, growing at a 2.2% pace after contracting slightly in the second quarter. The rebound was fueled by higher spending at state and local levels, alongside increased federal defense expenditures.

By contrast, private business investment declined modestly, falling 0.3% during the quarter. The drop reflected ongoing weakness in residential investment and nonresidential structures such as offices and warehouses, sectors still adjusting to higher borrowing costs and shifting demand patterns. Even so, the decline was far smaller than the steep 13.8% fall recorded in the second quarter, suggesting that investment activity may be stabilizing.

A closely watched measure of the economy’s underlying strength — which includes consumer spending and private investment but excludes more volatile components such as exports, inventories and government spending — grew at a 3% annual rate, slightly faster than in the previous quarter.

Trade and external demand

Trade also played a notable role in boosting headline growth. Exports surged at an 8.8% annual rate in the third quarter, while imports fell by 4.7%, adding to overall GDP. A weaker dollar earlier in the year and solid foreign demand for U.S. goods and services helped support export growth.

The Commerce Department emphasized that Tuesday’s release represents the first of three official estimates for third-quarter GDP, meaning figures may be revised as more data become available.

Broader economic backdrop

Outside of the first quarter, when economic output briefly contracted for the first time in three years as companies rushed to import goods ahead of President Donald Trump’s tariff rollout, the U.S. economy has continued to expand at a healthy pace. That resilience has persisted despite sharply higher borrowing costs imposed by the Federal Reserve in 2022 and 2023 to contain inflation following the strong post-pandemic recovery.

Although inflation has eased significantly from its peak, it remains above the Fed’s target. In response to signs of a cooling job market, the central bank cut its benchmark lending rate three times toward the end of 2025, seeking to support employment without reigniting price pressures.

Recent labor market data present a mixed picture. The government reported that the economy added 64,000 jobs in November, offset by a loss of 105,000 positions in October. The unemployment rate rose to 4.6% last month, its highest level since 2021.

Economists describe the labor market as being in a “low hire, low fire” phase, with businesses reluctant to expand payrolls amid uncertainty over trade policy, tariffs and the lingering effects of elevated interest rates. Since March, monthly job creation has averaged about 35,000, roughly half the pace seen in the year ending in March.

Federal Reserve Chair Jerome Powell has cautioned that employment figures are often revised and suggested that recent job gains could ultimately be adjusted lower, reinforcing the delicate balance facing policymakers.

For now, the third-quarter GDP data highlight an economy that continues to grow at a solid clip, even as inflation and labor market signals leave the path of monetary policy far from certain.