U.S. Economy Grows 4.3% Amid Persistent Inflation Challenges

Dec 25, 2025, 2:56 AM

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The US economy grew at a surprisingly strong 4.3% annual rate in the third quarter, marking the most rapid expansion in two years. This growth was primarily driven by consumers who continue to spend despite ongoing inflationary pressures.

According to the Commerce Department, the gross domestic product (GDP) from July through September rose from a 3.8% growth rate in the previous quarter. Economists had anticipated a more modest growth of just 3% during this period, highlighting the unexpected strength of consumer spending, which accounts for about 70% of US economic activity. Consumer spending increased to a 3.5% annual pace last quarter, up from 2.5% in the April-June period.

However, some economists caution that this growth spurt may be short-lived. The extended government shutdown could negatively impact the economy in the fourth quarter, alongside a growing number of Americans feeling fatigued by persistent inflation. A recent survey by the Conference Board indicated that consumer confidence has slumped to levels not seen since the US implemented broad tariffs on its trading partners earlier this year.

Stephen Stanley, chief US economist at Santander, noted that the surge in consumer spending resembles last year's fourth quarter, suggesting that households may soon need to take a breather. This situation reflects a "K-shaped economy," where wealthier Americans benefit from rising incomes due to stock market gains, while lower-income households struggle with stagnant wages and higher prices.

The GDP report also revealed that inflation remains above the Federal Reserve's target. The personal consumption expenditures (PCE) index, the Fed's preferred inflation gauge, climbed to a 2.8% annual pace last quarter, up from 2.1% in the second quarter. Core PCE inflation, which excludes volatile food and energy prices, rose to 2.9% from 2.6% in the previous quarter.

Economists warn that persistent inflation could hinder the likelihood of an interest rate cut by the Fed in January, despite concerns about a slowing labor market. Chris Zaccarelli, chief investment officer for Northlight Asset Management, stated that if the economy continues to perform at this level, there may be less urgency to address a slowing economy, although inflation could emerge as a significant threat.

Investment in artificial intelligence (AI) also contributed to economic growth, with spending on intellectual property increasing by 5.4% in the third quarter, following a 15% jump in the second quarter. Government consumption and investment grew by 2.2% in the quarter, bolstered by increased expenditures at state and local levels, as well as federal defense spending. However, private business investment fell by 0.3%, primarily due to declines in housing and nonresidential building investments.

Exports grew at an impressive 8.8% rate, while imports, which subtract from GDP, fell by 4.7%. The report is the first of three estimates the government will release regarding GDP growth for the third quarter of the year.

Despite the robust growth, the labor market remains a concern. The US economy added 64,000 jobs in November but lost 105,000 in October, with the unemployment rate rising to 4.6%, the highest level since 2021. Economists describe the labor market as being in a "low hire, low fire" state, with businesses hesitant to make significant changes due to uncertainties surrounding tariffs and the effects of elevated interest rates. Job creation has averaged only 35,000 per month since March, a significant drop from the 71,000 average in the previous year.

In summary, while the US economy's growth in the third quarter is a positive sign, the challenges posed by inflation and a potentially unstable labor market raise questions about the sustainability of this momentum moving forward.

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