Strong consumer spending growth (despite Sour Mood), big improvement of trade deficit, and government spending growth after two quarters of declines.

By Wolf Richter for WOLF STREET.

Today’s GDP report, delayed by the government shutdown, was the “initial” report for the third quarter. Data collection for it occurred before the government shutdown. It replaces the “advance estimate,” which got canceled due to the shutdown at the time, and the “second estimate” (originally scheduled for November 26). So this release is essentially the “second estimate” and includes the revisions that would have been part of the second estimate.

And WOOSH went the economy in Q3. Gross Domestic Product, the broadest measure of the economy, grew by an annual rate of 4.3% in Q3, adjusted for inflation, after the 3.8% growth in Q2, and the -0.7% decline Q1, according to the Bureau of Economic Analysis today.

By comparison, in the years between the Great Recession and the pandemic (so excluding recessions), average quarter-to-quarter GDP growth was 2.5% annual rate. The average 20-year quarter-to-quarter GDP growth, including recessions, was 2.2% annual rate.

The decline in Q1 had been driven by an explosion of imports due to tariff frontrunning. Imports deduct from GDP; exports add to GDP. But that frontrunning of tariffs in Q1 and other trade shifts due to tariffs caused a dramatic improvement of the trade deficit in Q2 and Q3, from the horrible levels of Q1, contributing substantially to the high growth rates in both quarters.

Consumers also pitched in and spent hand over fist, despite their allegedly very sour mood as depicted by these silly consumer sentiment surveys. Consumer spending, adjusted for inflation jumped by 3.5%, the highest since the red-hot quarters last year.

Government consumption expenditure and investment (federal, state, and local) also rose, after two quarters of declines.

But Gross private domestic investment deducted 3 basis points from GDP growth, with fixed investment adding only 19 basis points (as residential fixed investment continued its plunge, while other fixed investment rose), and with change in private inventories deducting 22 basis points from GDP growth. So this time, no help from the investment department.

The core of the private US economy, “Final sales to private domestic purchasers,” excludes the above complications of exports, imports, government spending, and changes in inventories. This measure rose by an annual rate of 3.0% in Q3, adjusted for inflation, the best growth rate since Q4 2023. So at the core, the US economy continues to hum along at solid growth rates.

Here is overall GDP growth, adjusted for inflation.

Not adjusted for inflation, “current-dollar GDP” grew by an annual rate of 8.2% to $31.1 trillion, after the 6.0% growth in Q2.

This “nominal GDP” it represents the actual size of the US economy in current dollars and forms the basis for the Debt-to-GDP ratio and similar GDP-based ratios.

The chart shows current dollar GDP, expressed in seasonally adjusted annual rates. You can see the sharp acceleration over the past two quarters, following the dip in Q1:

Consumer spending rose by an annual rate of 3.5% in Q3, adjusted for inflation, to $16.6 trillion. This growth rate added 2.39 percentage points to the GDP growth of 4.3%.

Consumer spending accounted for 69% of the US economy.

The spending growth was spread across goods and services:

• Services: +3.7%.
• Durable goods: +1.6%
• Nondurable goods: +3.9%.

The blue columns show the growth rates (left axis), the red line shows the dollars (right axis), all in seasonally adjusted annual rates (SAAR):

Private fixed investment, which excludes changes in inventory, rose by only 1.0% annualized and adjusted for inflation, after having jumped by 4.4% and 7.1% in the prior two quarters. Of which:

• Nonresidential fixed investments: +2.8%:
  • Structures: -6.3%
  • Equipment: +5.4%.
  • Intellectual property products (software, movies, etc.): +5.4%.
• Residential fixed investment: -5.1%.

Private fixed investment accounted for 18% of the US economy.

Government consumption expenditures and gross investment rose by 2.2% annualized, adjusted for inflation, after two quarters of declines.

Federal government spending rose by 2.9% annualized, after two quarters of declines, on a jump in national defense spending, while nondefense spending continued to decline for the third quarter in a row:

• National defense: +5.8%
• Nondefense: -1.1%

The increase in federal government spending added 19 basis points to the 4.3% of total GDP growth.

This does not include interest payments, and it does not include transfer payments directly to consumers (the biggest part of which are Social Security payments), which are counted in GDP when consumers and businesses spend these funds or invest them in fixed investments.

State and local government spending rose by 1.8%, the slowest growth rate since Q4 2022.

Combined, federal, state, and local government consumption and investment accounted for 17% of the US economy.

The majority (61%) of government spending came from state and local governments. Federal government spending accounted for 39% of total government spending.

The Trade Deficit improves.

Imports dropped by 4.7% in Q3, to $3.66 trillion annualized after having already plunged by 29% in Q2, more than undoing the entire historic tariff-frontrunning spike in Q1. Imports are a negative in GDP, and when imports drop, they improve GDP.

• Imports of goods: -7.5% to $2.93 trillion
• Imports of services: +6.3% (includes US tourists spending overseas) to $721 billion.

Exports jumped by 8.8% in Q3 from Q2, to $2.70 trillion. Exports are a positive in GDP.

• Exports of goods: +7.4% to $1.77 trillion.
• Exports of services: +11.2% to $933 billion (includes foreign tourists spending in the US).

“Net exports” (exports minus imports) improved further to an inflation-adjusted trade deficit of $957 billion, the least bad trade deficit since Q4 2023, and a level first seen in Q3 2021.

The core of the private US economy: “Final sales to private domestic purchasers,” included in the GDP report today, is a measure of the private US economy. It excludes exports, imports, government consumption expenditures, government gross investment, and changes in inventories. It covers about 87% of GDP and presents the core of the private US economy.

Final sales to private domestic purchasers rose by an annual rate of 3.0% in Q3, the best growth rate since Q4 2024, to $21.0 trillion.

The Fed needs to watch out. The economy is running hot. This makes for two quarters back-to-back with hot economic growth, driven in part by strong consumer spending, despite all doom-and-gloom consumer sentiment surveys.

Maybe economic growth is slowing down in Q4, and maybe it will slow down next year, or whatever. But those are speculations. Consumers have surprised quarter after quarter. They’re making record amounts of money, and they’re spending it, and they’re saving some too. The trade shifts are now coming into focus. And the much-discussed decline in residential fixed investment is overcome by increases in other categories of fixed investments.

The last CPI inflation report was marred by missing data due to the government shutdown and gave misleading inflation figures. This is not an economy that needs a rescue through rate cuts. This is an economy that is a feeding ground for inflation.

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WOLF STREET FEATURE: Daily Market Insights by Chris Vermeulen, Chief Investment Officer, TheTechnicalTraders.com.