The U.S. economy likely maintained solid growth in the third quarter of 2025, driven by robust consumer spending and business investment, although momentum appears to be slowing due to rising costs of living and the impact of a recent government shutdown. According to preliminary estimates from the Commerce Department, gross domestic product (GDP) is expected to have increased at a 3.3% annualized rate, slightly lower than the 3.8% growth recorded in the second quarter.

Consumer Spending Fueled by Wealthier Households

Much of the third-quarter growth was powered by higher-income households, benefiting from a booming stock market and increased household wealth. Surveys indicate that consumer spending, which accounts for over two-thirds of U.S. economic activity, accelerated due to services such as air travel, hotel stays, and a rush to purchase electric vehicles (EVs) ahead of the expiration of tax credits at the end of September.

In contrast, lower- and middle-income households have faced financial pressures, spending more on essential items like groceries while cutting back on discretionary purchases such as dining out, clothing, and travel. Economists have described this as a K-shaped recovery, where economic gains are unevenly distributed across different income groups.

Brian Bethune, an economics professor at Boston College, noted:
“It was a good quarter, but that is not going to be sustained in the fourth quarter. Household budgets are squeezed, and the average household is just barely keeping their nose above water in terms of real wage gains.”

Business Investment and AI Growth

Despite challenges from President Trump’s tariffs, large businesses have largely weathered the storm and are investing heavily in artificial intelligence (AI), intellectual property, and equipment. Analysts say these investments are helping to reinforce the economy’s long-term growth potential. However, smaller businesses have been disproportionately affected by rising import costs and supply chain disruptions.

Bernard Yaros, lead U.S. economist at Oxford Economics, explained:
“Despite the ongoing boom in data center construction, a decline in drilling rigs amid falling oil prices likely dragged down business structures investment.”

Trade Deficit and Residential Spending

A smaller trade deficit likely also contributed positively to GDP, as fluctuations in imports caused by tariffs have created unusual swings in the past year. Conversely, residential spending, including homebuilding and sales, is expected to have contracted for a third straight quarter due to higher mortgage rates, rising construction costs, and duties on imported materials.

Inflation and Federal Reserve Policy

Inflation pressures remain, with the Personal Consumption Expenditures (PCE) Price Index expected to have increased at a 2.8% annual rate in Q3, up from 2.1% in Q2. The Federal Reserve recently cut its benchmark overnight interest rate by 25 basis points to the 3.50%-3.75% range, though officials signaled that borrowing costs are unlikely to fall further in the near term while monitoring labor market and inflation trends.

Government Shutdown Impact

The delayed release of economic data, caused by a 43-day government shutdown, has complicated analysis. The Congressional Budget Office (CBO) estimates the shutdown could reduce GDP growth by 1.0–2.0 percentage points in the fourth quarter, though most losses are expected to be recovered over time, with $7–14 billion projected to remain lost.

Outlook for Fourth Quarter and Beyond

Economists predict a slower pace of growth in the fourth quarter, as consumers and businesses face higher costs, reduced government spending, and other pressures. However, the economy is expected to rebound in 2026, particularly as AI investments continue and inflation stabilizes.

Sal Guatieri, senior economist at BMO Capital Markets, said:
“The AI boom is masking the ill effects of the trade war. Growth will slow further in the fourth quarter due to the government shutdown before rebounding in the new year.”