GDP looks strong despite a turbulent year. Can the U.S. economy keep it up?

By Jeffry Bartash

U.S. economy shows surprising pluck in 2025

The U.S. economy hit turbulence in 2025, but it kept on growing.

The kitchen sink was thrown at the economy in 2025 - punishing tariffs, higher inflation, rising unemployment - but the U.S. might still be growing at an above-average speed in a sign of surprising pluck.

Gross domestic product, the official scorecard of the economy, is forecast to show 3.2% annual growth in the third quarter when the report is published Tuesday. The GDP report was postponed two months because of the government shutdown.

The U.S. also expanded at a frothy 3.8% pace in the second quarter.

Most Wall Street SPX DJIA economists believe the U.S. can only grow about 1.8% a year under ideal conditions, making its recent performance all the more startling.

The sharp rebound in the economy in the middle of the year, what's more, came after a rare negative GDP print in the first quarter that seemed to signal trouble ahead due to the highest U.S. tariffs in decades.

American businesses rushed to buy foreign goods and supplies early in the year before President Trump's tariffs raised prices. The record rise in the trade deficits depressed GDP.

In the spring and summer, however, U.S. households timed their purchases of imported goods such as autos, appliances and other big-ticket items to take advantage of temporary delays or reductions in tariffs.

The rise in consumer spending - the biggest source of economic growth - helped to spearhead the upturn in GDP.

Even if the effects of tariffs on consumer shopping habits were ignored, household spending is still stronger than expected.

How come?

Incomes are rising slightly faster than inflation, for one thing.

Unemployment, meanwhile, is still historically low even though it's risen to a four-year high of 4.6%. Layoffs have also stayed extremely low and most people feel secure in their jobs, giving them the confidence to spend.

Finally, a raging bull market has boosted the wealth of upper-income families, leading to what economists call a bifurcated economy. The better off are still spending plenty of money, while middle- and lower-income families are struggling to keep up.

Will the fourth quarter show more of the same? Analysts say consumer spending appears to have slowed in the fourth quarter, suppressed in part by the record 43-day government shutdown in which hundreds of thousands of federal workers went unpaid.

If so, GDP growth is also likely to taper off.

It may be a while before anyone knows for sure, however, because the now-ended standoff has delayed most key economic reports until early 2026.

"We have little data at this point, but a slowing to our projected 1.5% pace would be largely tied to a dent from the government shutdown," said Avery Shenfeld, chief economist at CIBC Capital Markets.

The other critical source of U.S. growth this year has been an astonishing increase in corporate spending on artificial intelligence - to the tune of hundreds of billions of dollars.

Spending on AI has more than offset weaknesses in investment and production of other manufactured goods outside the tech sector. Tariffs have especially punished more traditional manufacturers.

The adoption of AI, some economists argue, largely explains why the U.S. might be able to grow significantly faster than what economists view as its 1.8% annual speed limit.

The new technology is making companies more productive and more profitable, they say, and that benefits the economy as a whole.

The new year should also benefit from lower interest rates, relaxed tariffs, fewer taxes and regulations, and more government spending in a midterm-election year.

The Federal Reserve, taking into account these new realities, recently upped its GDP growth forecast for 2026 to 2.3% from 1.8%. That's a big switch for the normally conservative forecasters at the Fed.

Lots of people on Wall Street are also on board.

"We expect a reacceleration in growth going into 2026," economists at Nomura wrote in a note to clients.

-Jeffry Bartash

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12-22-25 1311ET