The headline number was impossible to ignore: U.S. gross domestic product surged at a 4.3% annualized rate in the third quarter — the fastest pace in two years. It outpaced economists’ expectations and delivered a splash of optimism after a year of jittery markets, trade tensions and a persistent tug-of-war between inflation and slower hiring.
That vigor wasn’t a single-source story. Consumers opened their wallets, exports jumped, government spending ticked up, and businesses kept plowing money into intangible assets — particularly in areas tied to artificial intelligence and software. At the same time, a less-visible story played out beneath the surface: inflation nudged higher and the labor market lost some steam.
What moved the needle
Consumer spending, which accounts for roughly 70% of U.S. economic activity, accelerated to a 3.5% annual pace in Q3, up from 2.5% in the previous quarter. People kept buying services and experiences even as prices rose. Exports were a surprise engine for growth as well, climbing at an 8.8% annual rate; imports fell, which mechanically boosted GDP because net trade is exports minus imports.
Investment in intellectual property — the GDP category that captures software and AI-related spending — rose 5.4% in the quarter after a very large leap in the prior period. That pattern suggests firms are still funneling cash into the tools and platforms they hope will deliver higher productivity. For examples of the kind of technology skewing investment, think of major new models and imaging tools rolling out from big tech players and labs; enterprises are buying those capabilities, and the effects show up in these GDP subcategories. See how fast companies are moving on AI with platforms like Microsoft’s MAI-Image-1 and deep-research integrations such as Gemini Deep Research that aim to fold large-scale models into workplace search and analytics.
Government spending at federal, state and local levels added to growth too — especially defense and state-local outlays that reversed a small contraction from earlier in the year.
The inflation and jobs puzzle
Growth arrived with a tilt: inflation moved up. The personal consumption expenditures (PCE) price index — the Fed’s preferred inflation gauge — rose at a 2.8% annualized pace in Q3; core PCE (excluding food and energy) was 2.9%. Both sit above the Fed’s 2% target. That’s significant because stronger inflation complicates the central bank’s calculus on rate cuts.
And yet the labor market has cooled. Hiring slowed through the second half of the year, and the unemployment rate climbed to 4.6% in November — the highest since 2021. Job creation since March has averaged markedly lower than earlier in the recovery, leaving policymakers and investors wondering whether growth is broad-based or concentrated among higher-income households who can still spend.
Economists toss around the term “K-shaped” to describe that divergence: some households — often older or wealthier — are benefiting from asset gains and steady pay, while lower- and middle-income workers face stagnant wages and higher costs. The data suggest spending strength may be concentrated among those better able to absorb price increases.
Is the third-quarter boom sustainable?
A chorus of forecasters says no. The 43-day government shutdown that stretched into Q4, along with consumer fatigue from “stretching” budgets, likely trimmed activity later in the year. Paul Ashworth of Capital Economics pegs Q4 growth nearer to 2% annualized; others describe Q3 as broad but likely unsustainable without stronger hiring.
Some of the components that powered the big print are also volatile by nature — exports and inventory shifts can swing from quarter to quarter. Meanwhile, private business investment in structures and housing actually dipped slightly in Q3, underscoring that not every corner of the economy is booming.
What this means for policy and markets
Inflation running above 2% complicates hopes for an immediate, aggressive easing cycle. Even though the Fed cut rates three times late in the year to address a deteriorating jobs picture, a persistent rise in PCE could make additional early cuts less likely. Market-watchers will be closely watching upcoming revisions to the GDP data and fresh labor reports to see whether the slowdown materializes as expected.
For businesses and households, the mixed picture matters. Firms that invested in AI and software may see payoff in productivity over the medium term; consumers who have been “stretching” may soon pull back, shifting the balance from services to savings and reducing demand growth.
The Q3 figure is a reminder that the U.S. economy is not a single story but a patchwork — some places and people prospering, others sputtering. That patchwork is what makes forecasting so thorny right now: strong headline growth, higher-than-desired inflation, and a softer labor market all at once.
If nothing else, the quarter keeps the conversation alive about how technology, trade and policy interact in an economy that keeps surprising both its skeptics and its believers.