US GDP (Q3 2025)

An adjusting economy

• Real GDP growth was revised up a tick to 4.4% in Q3 2025, marking its strongest advance in two years. Momentum was driven by resilient consumer spending, robust equipment and artificial intelligence (AI)-related investment, a sizable boost from net international trade and a rebound in federal government outlays.
   
• The US economy is neither overheating nor stalling — it is adjusting. That adjustment follows an unusually intense set of crosscurrents. The cost of trading with the US rose sharply in 2025, with the average tariff rate increasing from roughly 2.5% to around 16.5%, while the trade outlook remains highly uncertain. Net migration has fallen from over 2 million annually to nearly zero, with a non-negligible risk of negative net migration in 2026. At the same time, AI-driven investment has surged — lifting capital spending, software and R&D — delivering early firm-level productivity gains alongside increasingly concentrated equity market performance.
   
• A jobless expansion where most people still have jobs is keeping the unemployment rate steady despite historically low hiring, negative job growth and recessionary levels of job concentration across sectors. Broader labor-market indicators point to mounting strain as persistent policy headwinds and a high-cost, high-interest-rate environment have pushed business leaders into cost-control mode. Looking into 2026, we expect the unemployment rate to drift higher while monthly job growth remains stuck around 30,000.
   
• Despite the One Big Beautiful Bill Act (OBBBA) and larger tax refunds, which should provide a modest fiscal tailwind in the first half of the year, current consumer strength remains heavily reliant on higher-income households, greater comfort with borrowing and continued drawdowns of savings. As job growth and wage gains slow, this support is likely to fade, setting the stage for more moderate consumer spending in 2026.
   
• The Fed landscape is unusually complex. Amid growing political pressure, the policy path remains uncertain. However, US Supreme Court justices’ skepticism toward a bid to fire Federal Reserve Governor Lisa Cook, alongside bipartisan congressional support for Fed Chair Jerome Powell amid the Department of Justice probe, signals a preservation of critical Fed independence — for now. We anticipate 50 basis points (bps) of easing through 2026 as labor market fundamentals soften and personal consumption expenditures (PCE) inflation hovers around 3% before easing toward 2.5% by year-end.
   
• Looking ahead, we have revised our 2026 real GDP growth forecast up to 2.5%, reflecting a strong expected end to 2025. However, downside risks to the economy and financial markets remain unusually elevated, stemming from tariffs and trade uncertainty, geopolitical stress and energy price swings, fiscal concerns and questions around Fed independence. We expect real GDP to advance 3.2% in Q4 2025. For 2025 as a whole, we anticipate average GDP growth of 2.3%.

Main takeaways from GDP report: 

• Domestic demand was robust in Q3. Final sales to domestic purchasers rose 2.8% on the quarter and 2.3% year over year (y/y). Final sales to private domestic purchasers — excluding government spending — rose 2.9% on the quarter and 2.6% y/y.
   
• Corporate profits with inventory valuation and capital consumption adjustments rose $175.6b in Q3. Domestic nonfinancial profits rose $77.9b while domestic financial profits rose $47.3b and rest-of-the-world profits increased $50.4b. Profit margins rose a tick to a historically elevated 13.2% of GDP despite rising cost pressures from tariffs. It’s likely these will come under more acute pressure in the coming quarters as businesses attempt to avoid losing market share in a competitive pricing environment.
   
• Consumer spending remained the primary engine of growth. It expanded at a 3.5% annualized pace, contributing 2.3 percentage points (ppt) to real GDP growth. Nondurable goods spending rose 3.9%, supported by stronger clothing outlays and moderate gains in groceries and gasoline. Durable goods spending increased a modest 1.5%, as sharp declines in motor vehicles and home furnishings were offset by a surge in recreational goods. Services spending rose 3.6%, accelerating from 2.6% in Q2, led by healthcare, recreation and transportation services.
   
• Business investment was bifurcated and led by AI-related capex. Overall investment grew 3.2%. Equipment investment rose 5.2%, driven by strong spending on information processing equipment. Investment in intellectual property products increased 5.6% following a 15% surge in Q2, led by software and R&D as generative AI-driven capital deepening gained traction. In contrast, private structures investment contracted for a seventh consecutive quarter, falling 5.0%.
   
• Housing remained under pressure from historically low affordability. Residential investment declined at a 7.1% annualized pace – its third consecutive quarterly decline. Over the past six quarters, housing investment has only increased once, with real investment down about 4% from its early 2024 levels.
   
• International trade dynamics remained volatile amid trade conflict. Net trade added 1.6ppt to GDP growth, reflecting a continued pullback in imports, which fell 4.4% following a 29.3% plunge in Q2, alongside a robust 9.6% rebound in exports.
  
  
• Government spending rebounded. Outlays rose 2.2% after contracting in the first half of the year. Federal spending increased notably, with strong defense outlays more than offsetting a modest decline in nondefense spending (reflecting Department of Government Efficiency (DOGE) cuts).
   
• Inflation firmed amid gradual tariff pass-through. Headline PCE inflation rose 0.3ppt to 2.7% y/y, while core PCE inflation increased 0.2ppt to 2.9% y/y. We expect consumer price inflation to drift higher toward 3.0% in early 2026 before gradually easing below 2.5% in the second half of the year.

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.