U.S. Economy Grows Much Better Than Expected in Q3 as Solid Spending and Tariff Easing Support Growth

The U.S. economy expanded at a much stronger-than-expected pace in the third quarter, powered by resilient consumer spending, higher government outlays, and a surge in exports, according to a delayed Commerce Department report released Tuesday.

Gross domestic product rose at a 4.3% annualized rate from July through September, accelerating from 3.8% in the second quarter and marking the fastest growth in two years. Economists surveyed by Dow Jones and FactSet had expected growth closer to 3%–3.2%.

Consumer spending, which accounts for roughly 70% of economic activity, increased at a 3.5% annual pace, up from 2.5% in the prior quarter. Government consumption and investment rose 2.2% after contracting in the second quarter, supported by higher state and local spending and increased federal defense outlays. Exports jumped 8.8%, while imports fell 4.7%, providing an additional lift to headline growth.

Private business investment declined 0.3%, dragged down by weakness in housing and nonresidential structures such as offices and warehouses. However, the pullback was far milder than the 13.8% plunge seen in the second quarter, helping to stabilize overall growth.

A key measure of underlying demand, real final sales to private domestic purchasers—which excludes volatile components such as exports, inventories, and government spending—grew at a 3% annual rate, slightly faster than in the previous quarter. Federal Reserve officials closely monitor this gauge for signals of sustainable consumer demand.

Inflation, however, remained elevated. The personal consumption expenditures price index, the Fed's preferred inflation measure, rose at a 2.8% annual rate in the third quarter, up from 2.1% previously. Core PCE inflation, which strips out food and energy, accelerated to 2.9% from 2.6%. A broader chain-weighted price index climbed 3.8%, well above forecasts, underscoring persistent price pressures.

The strength of growth contrasted with lingering inflation concerns, complicating the outlook for monetary policy. Economists noted that sticky inflation could reduce the likelihood of a near-term rate cut, even as the Federal Reserve remains concerned about a cooling labor market.

Elsewhere in the report, corporate profits surged by $166.1 billion, or 4.2%, a sharp rebound from the modest $6.8 billion increase recorded in the second quarter.

The GDP release had originally been scheduled for late October but was postponed due to the government shutdown. It serves as the first of three estimates for third-quarter growth, with a final revision to be released later.