U.S. economy grew 4.3% before government shutdown, GDP shows, in biggest gain in 2 years

By Jeffry Bartash

Consumer spending and business spending on AI are key drivers

Never count out the American shopper, economists say. Strong consumer spending boosted GDP in the third quarter.

The U.S. grew at a frothy 4.3% annual pace in the third quarter - the biggest quarterly economic expansion in two years - but the economy is unlikely to match that feat in the waning months of 2025 due partly to the federal government shutdown.

Gross domestic product, the official scorecard of the economy, expanded rapidly for the second quarter in a row, the government said Tuesday. The GDP report was two months late due to the shutdown.

The economy also grew at an snappy 3.8% clip in the spring.

The rate of U.S. growth is on track to easily top 2% for the entire year, depending on what happens in the fourth quarter, which ends in eight days. The economy probably slowed in the final three months of 2025, partly because of the damage caused by the shutdown.

Still, a growth rate of 2% or more would be a victory of sorts for an economy that has encountered gusts of heavy headwinds through the year.

The resilience of the economy could also position the U.S. for similarly solid growth in 2026.

Key details: Consumer spending, the chief engine of the economy, grew at a brawny 3.5% rate in third quarter. Purchases of recreational goods and vehicles played a big role.

Some of the spending was likely tied to efforts by households to beat tariff-related price increases, raising questions about how sustainable it is.

What's more, consumers also appeared to spend most heavily on needs instead of wants - healthcare, car repair, insurance and the like. That's not going to make people happy, as surveys of consumers show.

Business spending on equipment, particularly artificial intelligence, has also been a major source of economic growth this year.

Spending on information-processing equipment rose 8.4% in the third quarter, offsetting weakness among traditional manufacturers outside of the tech industry.

Government spending rebounded in the third quarter after declining in the spring.

The strong GDP reading got a big assist from a decline in the U.S. trade deficit. A lower deficit added 1.6 percentage points to the official growth rate.

The headline increase in GDP, however, was depressed in part by slower production of inventories, or unsold goods.

So how does the economy look after sorting through all the noise? Economists like to focus on a different GDP figure that omits trade, inventories and government spending to get a better sense of the underlying strength of the economy.

By the measure, the economy still grew at a healthy rate of 3%.

What about the fourth quarter? Businesses have trimmed production to cope with softer sales and less customer demand triggered by the tariffs. A separate report on durable-goods orders showed just a small increase in October if transportation is excluded.

Inflation, meanwhile, rose at a 2.8% annual rate in the third quarter, up from 2.1% in the prior period. Higher U.S. tariffs put in place by the Trump administration contributed to the uptick in inflation over the summer.

Big picture: High U.S. tariffs, persistent inflation and rising unemployment haven't been enough to derail the U.S. economy.

Strong growth in the spring and summer offset a small contraction in GDP in the first quarter, positioning the economy to expand by at least 2% for the fourth year in a row.

Consumer spending, aided by record stock market gains, and huge business investment in artificial intelligence have been chief propellers.

Many economists also think the U.S. could expand 2% in 2026 for the fifth straight year - above the 1.8% growth rate that is considered the long-term norm under ideal conditions.

Yet such strong growth could also dissuade the Federal Reserve from cutting interest rates in 2026. "The report will greatly lessen the odds of a Fed rate cut on Jan. 28, and even adds some doubt about future moves," said senior economist Sal Guatieri of BMO Capital Markets.

Looking ahead: "While worries surrounding the jobs market, tariffs, and inflation continue to swirl, the economy continues to defy its doubters by chugging higher," said Bret Kenwell, U.S. investment analyst at eToro.

Market reaction: The Dow Jones Industrial Average DJIA and S&P 500 SPX opened mixed on Tuesday.

-Jeffry Bartash

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12-23-25 0945ET