Consumers fuel GDP growth

December 23, 2025

Today’s GDP release is the first for the third quarter but it equates to a revised release of the third quarter instead of a first release. The Bureau of Economic Analysis was able to incorporate more data than usual in this delayed release.

Real GDP growth surged at a 4.5% pace in the third quarter, overwhelming the already robust 3.8% pace of the second quarter. That means that the economy grew about as fast as it did in late 2023. There is one hitch: Growth and labor market outcomes have decoupled.

Employment rose by 160,000 jobs over the six months between April and September of this year. After revisions due in February, that figure could dip into the red. That contrasts with employment gains of 1.5 million in the back half of 2023 and represents a startling breakdown between economic growth and spending gains.

Firms are doing more with fewer workers. Many overshot on staffing during the hiring frenzy and are now using attrition or layoffs to bring staffing levels more in line with demand. Others are offsetting the squeeze on profit margins due to tariffs with layoffs and hiring freezes. AI innovations are moving at a breakneck pace, but adoption is concentrated in the largest, most tech savvy firms.

Consumer spending accelerated, rising at a 3.5% annual rate after posting a 2.5% gain in the second quarter. That is despite tanking consumer attitudes and a stalling labor market. Spending on services popped, driven by aging demographics and spending on GLP-1 drugs. Spending on healthcare rose at the fastest pace since the fourth quarter of 2022, which marked the height of the Omicron wave of COVID.

Separately, affluent households continue to step up and out. Spending on recreational services accelerated, even as low- and middle-income households took fewer vacations. The number of those out on vacation during the month of August reached the second lowest on record. Only August 2020 was weaker.

Housing activity remained in the doldrums. Residential investment fell 5.1%, marking its fifth decline in six quarters. Mortgage rates have come off of the lows hit in October, while construction costs have risen in response to tariffs. Home values have fallen in some places, but not enough to clear the bar on affordability for most first-time buyers.

Business investment slowed overall but remained buoyed by investment in AI infrastructure. Spending on data centers, computers, battery plants and research and development increased. The tech sector was able to secure tariff waivers. Investment elsewhere in the economy was tepid.  

Inventories drained for the second consecutive quarter as firms liquidated imports amassed prior to the April 2 tariff announcement. Firms are hesitant to stock up ahead of a ruling on the legality of many of the tariffs by the Supreme Court. We expect the administration to use other levers to rapidly reinstate tariffs if these are ruled unconstitutional.

Government spending rebounded as the tax and spending package for fiscal 2025 was approved in July. A surge in spending on defense more than drop offset nondefense outlays. The Department of Homeland Security received a particularly large infusion of cash. Spending by state and local governments slowed but remained positive.

The trade deficit narrowed, with exports rebounding and imports continuing their descent. Part of the weakness in imports is payback for the front-running of tariffs in the first quarter of the year. It truly was the mother of all front-running cycles.