I hope you are enjoying a wonderful holiday season surrounded by family and friends. Amidst the festivities, I wanted to share some thoughts on the U.S. economy following the latest GDP report released this week. Despite a year marked by significant political and policy shifts, the data shows an economy that remains resilient as we head into the new year.

The Headline: A Summer Surge
The U.S. economy grew at an annualized rate of 4.3% in the third quarter of 2025. This was not only higher than the 3.8% growth seen in the spring, but it also outpaced the 3.2% growth most experts were expecting. This represents the strongest expansion the U.S. has seen in two years.

What’s Driving the Growth?
Several key factors powered this “upside surprise,” though the story beneath the surface is more complex than a single number suggests.

  • Resilient Consumer Spending: Personal consumption was the primary engine, growing at a robust 3.5%. Interestingly, this was driven in part by increased spending on healthcare and recreational services, as well as products like personal computers and software.
  • The AI Wave: Business investment in equipment and software—particularly related to Artificial Intelligence—continued to support the economy. While the pace of AI spending has cooled slightly from the explosive levels seen early in the year, it remains a critical pillar of growth, contributing about 0.4 percentage points to this quarter’s GDP.

Understanding the Trade Impact
One of the most significant contributors to this quarter’s growth was the shift in international trade, which added 1.59 percentage points to the headline GDP. While a jump in exports provided a direct boost, the result was also heavily influenced by a continued decline in imports. In economic accounting, because imports represent domestic spending on foreign-made goods, they are subtracted from the total GDP calculation; therefore, when imports contract, it technically adds to the domestic growth figure. This trend is likely a response to evolving tariff policies, as businesses adjust their supply chains and inventory strategies in the face of new trade barriers.

The “K-Shaped” Reality
While the 4.3% growth rate sounds like a universal win, economists are increasingly noting a “K-shaped” recovery. This means that while the overall economy is growing, the experience is vastly different depending on where you sit:

  • Affluent households are benefiting from a strong stock market and high asset prices, allowing them to continue spending on services and travel, which grew by 3.7% this quarter.
  • Lower-income Americans are facing a different reality. Inflation-adjusted disposable income has remained flat, meaning many families are seeing their raises swallowed up by the rising costs of essentials.

Looking Ahead: The Shutdown and 2026
The reporting of this data was notably delayed by the government shutdown. Because of this, the strong 4.3% figure actually looks back at a period before the shutdown began. While the shutdown is expected to cause a temporary dip in growth for the final months of 2025, many analysts expect a recovery in early 2026 as federal spending resumes.

What This Means for Interest Rates
This strong growth data creates a challenge for the Federal Reserve. With a strong economy, the Fed may be less inclined to cut interest rates as aggressively as some had hoped. Inflation remains sticky at nearly 3%, and the Fed will likely maintain a cautious stance until they see clearer evidence that prices are cooling back toward their 2% target.

As we gather with loved ones during this season, I want to wish you and your family a joyful holiday season. It is a privilege to partner with you, and I look forward to working together toward a healthy and prosperous new year.