US GDP (Q3 2025 – first estimate)

A bright holiday gift, likely to fade

The US economy delivered a notable upside surprise in Q3, posting its strongest GDP growth in two years. Real GDP jumped by an annualized 4.3% in Q3 2025, building on a solid 3.8% increase in the previous quarter. This impressive momentum was fueled by resilient consumer spending, improved trade dynamics, continued robust investment by businesses in artificial intelligence (AI) technologies and rebounding government outlays – all despite mounting economic headwinds. 

While the latest data highlights the US economy’s resilience and its capacity to harness innovation and consumer strength to navigate headwinds, slower US growth and higher inflation are still on the horizon. We anticipate that US economic growth will moderate from 2.0% in 2025 to 1.9% in 2026 as the three narrow A-pillars of growth – affluent consumers, AI-driven investment and asset-price strength – become increasingly vulnerable. Consumer spending is likely to remain uneven: high-income households will continue to drive outlays while lower-income families will remain under pressure due to higher prices, slower wage and job growth, and elevated borrowing costs.

What are the main takeaways? 

• Domestic demand was robust in Q3. Final sales to domestic purchasers – GDP growth when excluding the contributions from trade and inventories – rose by 2.9% on the quarter and 2.4% year over year (y/y). Likewise, final sales to private domestic purchasers – also excluding government spending – rose 3.0% on the quarter and 2.6% y/y in Q3.
  
  
• Consumer spending was the primary engine of economic growth. It expanded at a robust annualized rate of 3.5% in Q3, contributing 2.4 percentage points (ppt)  to overall GDP growth. Nondurable goods outlays grew by 3.9% on stronger spending on clothing and moderate outlays on groceries and gasoline. Durable goods outlays rose a modest 1.6% as steep declines in motor vehicle and home furnishing outlays were offset by a surge in recreational goods spending. Services outlays rose 3.7%, following a 2.6% advance in Q2, boosted by spending on healthcare and recreation. 
  
  
• The capital expenditure outlook remained bifurcated, led by strong AI investment. Business investment grew at a moderate 2.8% in Q3, following growth of 9.5% and 7.3% in Q1 and Q2, respectively. Equipment investment grew 5.4%, driven by strong outlays on information processing equipment. Investment in intellectual property products increased 5.4% following a 15% surge in Q2. The advance was led by strong software and R&D investment – reflecting the early stages of generative AI-driven capital deepening. Meanwhile, private structures outlays contracted for a seventh consecutive quarter, down 6.3%, reflecting ongoing affordability constraints, reduced fiscal tailwinds and growing labor headwinds for construction. Residential investment also contracted at a 5.1% annualized pace for a second consecutive quarter.  
  
  
• Trade dynamics were volatile amid lingering policy uncertainty and tariffs. Net international trade made another sizable contribution to GDP growth, adding 1.6ppt to growth in Q3 after a 4.8ppt positive contribution in Q2. This stemmed from a continued unwinding of imports, which fell 4.7% on the quarter following a 29.3% plunge in Q2 while exports rebounded 8.8% in Q3. Meanwhile, inventories subtracted a mere 0.2ppt from real GDP growth in Q3.
  
  
• Government spending regained some traction. It increased by 2.2% after consecutive declines in the first half of the year. Federal expenditures saw a significant boost, with robust defense spending more than compensating for a modest decrease in nondefense outlays.
  
  
• Inflation gained renewed momentum, reflecting the gradual pass-through of higher tariffs to consumer prices. Headline personal consumption expenditures (PCE) inflation rose 0.3ppt to 2.7% y/y while core PCE inflation climbed 0.2ppt to 2.9% y/y. Tariffs are continuing to gradually pass through to consumer prices, but the recent government shutdown has muddied the inflation picture, adding volatility to the data and imparting a downward bias to inflation dynamics. We expect consumer price inflation to drift higher toward 2.9% in early 2026 and only gradually fall below 2.5% in H2.

Bottom line: for business executives, the environment ahead will require heightened agility in pricing, supply chain management and talent strategy. Companies should prepare for margin pressures, slower volume growth and lingering uncertainty. The AI investment boom offers opportunities for digital transformation, but overall, the balance of risks remains tilted to the downside, making proactive risk management and scenario planning essential for resilience and performance in the coming quarters.

The views reflected in this article are the views of the author(s) and do not necessarily reflect the views of Ernst & Young LLP or other members of the global EY organization.