We often talk about the $30 trillion American economy being a dynamic and resilient beast, and the gross domestic product data for the third quarter was no exception.
Nominal GDP expanded by 8.2% while real final private demand excluding trade and inventories advanced by a robust 3%, according to Commerce Department data released on Tuesday. Top-line real GDP advanced by 4.3% overall. This strong growth came despite the adverse trade and immigration shocks the economy has absorbed over the past year.
Yet at the same time, the labor market has been soft, with an average of 51,000 jobs created a month over the same period. That interplay—a surging economy and a soft labor market—is likely to be the major economic narrative next year.
A closer look at the data shows the K-shaped economy at work: Household consumption driven by higher-income consumers and AI-related investment accounted for just under 70% of total growth during the quarter.
This disconnect helps explain why the public, particularly those with lower incomes, remains sour on the economy heading into the holiday season.
The data
The strong top-line growth of 4.3% was driven by a second straight sharp decline in imports, a robust increase in consumption and sustained improvement in artificial intelligence-related capital expenditures.
Once one adjusts for the volatile trade and inventory categories, real final private demand increased by a strong 3% as real final sales jumped by 4.6%.
Household consumption jumped by 3.5% and accounted for 55% of total growth during the quarter. Outlays on durables advanced by 1.6%, nondurables by 3.9% and services by 3.7%.
Gross private investment declined by 0.3% because of a large 5.1% decline in residential investment. Nonresidential investment advanced at a strong 2.8% clip while overall fixed investment increased by 1%.
Spending on structures declined by 6.3%, yet outlays on equipment and intellectual property increased by 5.4% each.
AI-related investment accounted for nearly 14% of all growth during the quarter.
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Exports jumped by 8.8% with goods increasing by 7.4% and services rising by 11.2% while imports declined by 4.7% as purchases of foreign goods dropped by 7.5% while services increased by 6.3%.
Government consumption increased by 2.2% on the back of a large 5.8% rise in defense spending. State and local government spending increased by 1.8%.
Inventory accumulation declined by $29.6 billion, providing a modest drag on overall growth.
The takeaway
Robust 4.3% growth overall and 3% growth in real final private demand excluding trade and inventories normally would have set up for serious momentum heading into the final quarter of the year.
But the longest government shutdown in American history will most likely provide a drag of close to 1.5% on overall economic activity during the October to December period, which will set up for a soft growth estimate for the final quarter.
But the shape of things in 2026 are coalescing. Large tax cuts and the full expensing of capital investments will fuel growth well above the 1.8% long-term trend.
That growth, however, will most likely result in monthly job creation of 20,000 to 50,000 positions per month on average.
While the economy and financial markets will increase at a strong clip, job creation will continue to be tepid, and inflation will remain elevated at or near 3%, well above the Federal Reserve’s 2% target.
The great decoupling of jobs and growth will take some explaining to the American public.
