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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Thanks Mr wolf
I’m going to jump in and point out the absurd scenario that Wolf has documented trying as best he can, to avoid a biased interpretation of the state of the world.
The only solution is love. Merry Xmas
Yep. Time to pause the cuts for the foreseeable future.
I’m one to believe that cutting rates doesn’t really lead to employment growth..just fatter margins.
Exactly
The game, the misdirection narrative is that somehow lower rates…..already lower than historical norms….will some how reverse layoffs and improve employment for “Main Street”. But unemployment is still under 5%.
What is killing “Main Street” is the failure of the Fed to combat inflation.
Nearly everything is at all time highs and the Fed cuts. Its is remarkable.
And the deficit spending continues because the cost of borrowing is being sheltered by Fed gimmickry. IMO
The Fed aims at the “public bucket” but misses into the “elite bucket”. Darn. Almost every time.
That is the question that the every day American people are unaware of. They are focused on the job loss in America while our government shepherded the transfer of the American manufacturing base to the low cost labor force. A failed communist society facing the eternal choice:
To offer to build everything for a lot less than the idiot American patriot that still believes.
All the while, the so called Supreme Court have defined the only legal activity is fraud. Their misguided decision suggests that the President has a the rite of Kings to be immune from prosecution.
I agree to chill on the cuts and feel 3% is the new 2% anyways.
But Actually Rate Cuts Impact More Than Margins –
Labor / Employment
Banking & Financial Markets
Business / Corporate Finance
Households / Consumers
Housing / Real Estate
Inflation percent used should be closer to 8% and not a single person will change my mind. I bet we see 15%-20% inflation within a year.
U-Hal trucks are delivering Xmas stuff along with USPS, UPS,
AMZN, FedEx and WMT private guys with a camera. In Jan they will cannibalized each other. The middle class are buying in Dollar General. The rich sent Saks Fifths Ave to the recycle bin.
Last few years I’ve been a real Scrooge when it comes to spending.
I bet I get scrooge now, he prob had a hard upbringing. Finally got all his bills paid and out of debt, then he learned how good interest is for your bottom line!
Then every beggar on the high street comes a calling.
Bah Humbug I say!
😆 🎄
The positive I take from this is less likely to have rate cuts or at least fewer rates cut. If an economy was like a rising tide I would take away more positive from it. Not suggesting it is bad news by any means, just not particularly relevant in how I personally evaluate. To me it isn’t a contradiction to see a sour mood among consumers despite solid overall consumer spending and GDP.
Wolf, what about “productivity”? Could that be increasing and thereby justify lower rates?
There is no direct link between productivity and interest rates. Rising productivity is going to first and foremost increase profits — which is why companies go after increasing productivity. Companies are not going to voluntarily pass on their profits to consumers. Competition might force them to, but the thing about inflation is that companies have the confidence that they can get away with price increases. And as we have seen, corporate profits exploded during the big inflation years.
It’s lonely on my one-man island at times. Nonetheless, I continue to boycott Doritos, Name Brand Soft Drinks, Disney, NFL, Etc….
I’ll keep doing my part, if for no other reason than necessity. You can count on me to hold a grudge and keep those corporate profits smaller!
Happy holidays.
Yet you buy the off brand lower quality ingredient white box products to help the rando companies??
Like Aldi happy puffs or Trader Joe’s adventurer Rick Apple tarts?
Somebody is getting your fat dirty dollar
💵
I sat through a presentation by a bunch of heavy hitter insiders of HVAC recently. They had lots to say about AI, but the juicy stuff was related to prices and tariffs. Paraphrasing, industry is assuming tariffs are now a permanent fixture and will persist through any regime change. The government never gives up an income source.
One manufacturer also said point blank that they are NOT reshoring production, they spent decades building those relationships and supply chains – they will simply raise prices.
If other another manufactures reshore all or part of the production and don’t raise prices, than that big-mouth China-lover is going to go out of business or cut prices. Competition is a nasty thing. Customers set the actual transaction prices, not seller. If customers don’t go along with the price increase, the seller is f**ked.
Thanks Wolf’
SAAR: Seasonally Adjusted Annual Rate, But, also Sa’ar is Hebrew for Storm. May you all weather the upcoming Storm.
The Algo got the Bulls Tee d up for Santa rally that historically starts tomorrow, Wednesday, December 24, 2025, and goes through Monday, January 5, 2026. Will they hit the ball or miss? Am I the last bear? Did Gold hit its target today? Have fun!!
Mi yitan vena’avor et hasara
The shamelessly proffered idea that productivity will result in higher wages commensurate with the increase in productivity. For the last 50 years the so called productivity dividend has accrued to a class of people that don’t believe that the Constitution, beginning with the flagrant disregard of precedent, choosing instead to prove the historical skeptics correct in their warnings about the danger of thinking that a Republic has a hell of a chance of surviving.
The optic of a connected silicon valley company invented as a suckling on the tit of the mama pig the so called defense budget
I saw one of them bought a trophy property in Colorado.
The worst person winning is an excruciating experience
I just have a comment regarding the video and the astounding vertical move in metals, I looked at the chart of the silver ETF (SLV) going back 20 years, and the last time it was this far above its 200 day average–more than 70 percent– was April of 2011, and then it dropped from $47 to $33 (30%) in five days. I’m not making any predictions, just an observation.
Thank you for watching the videos. A new one almost every day. They’re interesting — Chris gets into lots of technical trading stuff.
Where do I go to view the videos?
My theory is people have too much excess money and want to gamble with it.
So you had Bitcoin at 120,000 or whatever , then it totally cratered by a 1/4th .
I mean that’s INSANE. If the S&P sank by 25% you would hear the moaning from the tallest peaks.
But it’s extra cash, so these people don’t really care.
So anyway, maybe that’s why all the metals and bitty bit coins are (or were 😂😂) up.
Nobody wants a traditional risk profile like the S&P, which is pretty friggin risky! They want to fill on gamble.
Short bonds!
You have to pay the dividend every month. You also risk big losses if the economy loses steam or stocks have a bear market (very possible in my opinion) and the Fed needs to lower rates for a genuine, legitimate reason.
I just heard the S&P might have to reprice due to these rate cuts.
That’ll be fun
Perhaps the stupidest rate cut in history.
Prob due to the fact the fed didn’t want to be occupied and forced to drop rates to 0.
An “understanding” (for now) if you will.
All they are doing is prolonging the inevitable. The Real Estate Guy wants 2% mortgages and he will fire anyone who gets in the way.
Should be quite a show, when viewed for a more than healthy distance.
The 1/2 trillion dollars increase in our means-of-payment money supply will not be “washed out”.
Overheated rooms in the Econo-lodge? Have a soothing glass of ice cold Bitcola! Wait..how can you tell if the glass is half-empty or half-full if you can’t see the product? Oh well, we can always go battleship shopping instead. Time for a bakesale. Let’s get those ICBM’s out the door. It’s big stick clearance days for Christmas. Mall’s open 24/7. (No cash exhanges permitted. Pennies will be rounded up to the nearest trillion.)
Hellvis needs boats! Hellvis needs boats!
Hellvis, Hellvis, Hellvis,
Hellvis, Hellvis, Hellvis,
Hellvis needs boats!
(RIP Mojo Nixon 1957-2024)
“Residential fixed investment: -5.1%.” I guess the new housing sickup continues.
A lot of that is the slowdown in multifamily construction, after years of the biggest boom since the 1980s. There are many cites with massive oversupply of brand-new and not yet completed multifamily buildings.
Tips tips tips tips buy your tips.
Also a takeaway from the feeling of late:
We’re miserable but living in Eden. 🤔
Wolf, fiscal deficit overall as percentage of GDP is decreasing. Isn’t that a good trend? I mean the debt to gdp since gdp is so strong.
So the “debt” (not “deficit”) to GDP ratio rose in Q3 to over 120% again, as the debt grew faster than nominal GDP. The debt jumped in Q3 to make up for the debt ceiling when the debt was fixed for 6 months. So that may not be fair. Q4 should give us a better read.
But yes, an economy that outgrows the growth of the debt would relieve fiscal pressures. But the people are paying for it through inflation. That has been a theme here for several years. This can easily get out of hand. And if the Fed is lax on inflation, it could be a big problem.
I often wonder if the amount consumer spending doesn’t slow down due to the ease of online shopping. And this habit was reinforced with pandemic lockdowns.
Going to the store is a different experience where people used to think twice about buying things. Even going to store was a chore that people sometimes just stayed home unless absolutely necessary.
Feeding ground for inflation.
That is what I am afraid of.
Dang.
Might be one of the reasons precious metals are surging up. People smell potential inflation and are looking for hedges.
It seems like everyone is confused about this economy. According to Bloomberg, we have GDP above all forecasts save one, inflation below all forecasts, consumer sentiment declining for five straight months, and the highest pessimism in the job market since 2021, with the leading story being a job market that’s more or less frozen like the housing market. There’s also a lot of concern about the default rates on auto loans, and how the incoming increases in health insurance premiums and the restart of student loan payments are going to affect all of that. Throw in a giant white swan called the “AI bubble,” and the sentiment surveys don’t look all that surprising.
One specific thing I’d like to know in regards to all this consumer spending, including on Black Friday etc, is which theory is correct: that people feel good and are splurging on all this stuff, or they feel bad and are pulling all of these purchases forward in anticipation of inflation, tariffs and a loss of job security – all of which would be more consistent with the surveys. Personally, the latter reason is why I’m buying anything that I am. Anyone else?
In a podcast yesterday, the chief economist at VantageScore (they do the credit score models) made some remarks about a third version of that theory: that he isn’t sure whether the increases in spending are due to people splurging or just due to the prices increasing. He also said that the spread in spending and default rates between the low and high ends of the income spectrum keeps widening, and he expects that people will have an even harder time of things going into next year, especially at the lower end, just based on trendlines alone.
I’m actually not that worried about AI bubble. Major players have lots of income streams. I wouldn’t compare the housing market to employment per se as housing prices will come down. My concern is entry level jobs and youth unemployment which will continue to get hammered by AI and other factors. That, and all the knock on affects are where I am worried. No reason to think the numbers in that area won’t get worse and accelerate.
“whether the increases in spending are due to people splurging or just due to the prices increasing.”
All the data here is adjusted for these price increases. The measure used to adjust overall GDP to inflation rose by 3.7% in Q3, as per today’s GDP report. Not adjusted for inflation, GDP rose by 8.1%.
There is only confusion if you listen to those who want there to be and it is not just about the economy. Listen to the numbers.
Q3 numbers were strong and beat expectations
Inflation is easing, but still needs watching but it ain’t at 9%
Spending, wages, and jobs all moved higher largely benefiting US citizens
Housing is finally cooling improving AFFORDABILITY
Markets on track to finish year at record highs
Holiday spending looks epic; groundwork set for 2026 to ROAR
Net Exports of non-monetary gold (NMG) in Q3 had a significant impact on net trade and accounted for the majority of the reduction in the US trade deficit.
Given these Q3 GDP numbers are considered the revision, is it correct to assume that any impact of NMG for investment (non-industrial usage), which should be the vast majority of the net export, have been stripped out of the calcs?
No, imports and exports of nonmonetary gold have close to ZERO impact on GDP because most of it is removed from imports and exports for GDP calculations because it’s considered an investment (asset transfers) like investments in stocks, and not new production. That has always been the case.
This is exactly the issue that caused the Atlanta Fed GDPNow to blow up in Q1; those folks didn’t remove monetary gold in Q1, and it really screwed up GDPNow. And so they shut down that model, and started a new model for Q2 that removes monetary gold from imports and exports.
I covered all this here:
https://wolfstreet.com/2025/04/28/how-gold-imports-blew-up-the-atlanta-fed-gdpnow-the-old-model-is-dead-long-live-the-new-gdpnow-model-starting-apr-30/
Copper Hits $12,000 for First Time as Tariff Trade Upends Market…
Gold and Silver More Records…
Commerce Secretary Howard Lutnick had suggested changing the methods for GDP calculation. If it is not changed yet, we can be assured he is going over the data with a fine toothed comb to make sure we are correctly reporting the glass half full instead of half empty.
He wants to remove government expenditures and investments from the GDP calculation. But we already have a GDP calculation that excludes government spending, along with imports and exports, and inventory change: “Final sales to private domestic purchasers.” See the last chart in the article.
He will not be able to replace GDP with that; but they might add an additional GDP measure, with everything in it except government. So we’ll have three measures to look at here, instead of two.
Saks, the 101-year-old department store chain teeters on the brink of bankruptcy amid slumping sales
Luxury department store giant Saks — which owns Saks Fifth Avenue, Saks Off Fifth and Neiman Marcus — is edging closer to bankruptcy as it struggles under a mountain of debt.
Insiders have warned the company may have little choice but to seek Chapter 11 protection as a major debt payment deadline approaches, Bloomberg first reported.
Saks is facing more than $100 million in interest payments due by the end of this month, and insiders say executives are scrambling to find cash.
Options on the table include raising emergency financing, selling assets — or, as a last resort, filing for bankruptcy protection.
Founded in 1924, Saks built its reputation dressing Hollywood stars, society figures and well-heeled shoppers long before luxury brands sold directly to consumers online.
Its flagship on Fifth Avenue in New York became a tourist attraction in its own right, famous for its elaborate holiday windows and front-row access to the world’s biggest designers.
In recent years, Saks has struggled to adapt to a luxury market transformed by internet shopping and brand-owned stores.
The crisis marks a dramatic turn for a retailer that only last year pitched a bold comeback plan built around its $2.7billion takeover of rival Neiman Marcus.
I’m surprised Saks survived as long as it did. The list of retailers that filed for bankruptcy and were liquidated since 2016 is HUGE, and I captured a bunch of them in my series Brick-and-Mortar Meltdown, which I started in 2016 when ecommerce started killing those retailers. Add I’m going to finally get to add Saks to it when it kicks the bucket.
I’m going to hope the Fed is keeping their eye on the contributions to GDP from the AI shell game.
This is exactly why I’m deep into a crude oil ETF. $58 a barrel is too cheap when the US economy is running this hard AND the government is doing all it can to blow up inflation.
PM’s are at risky levels. Long term bond yields are trending up but not consistently enough to short. Natural gas is through the roof and the EV subsidies/regulations are being rolled back in North America and Europe.
Oil is the logical bet right now.
Nah. The economy doesn’t rely on oil the way it did historically. And with the drill baby drill attitude currently in fashion, pressure on prices may be downward.
USO? Others are similar. But USO has a long history. So go look at the max chart that takes you to 2006. At the peak in 2008, USO traded at close to $1,000. Today it’s at $70. While WTI went from $150 to $58 over the same period. If you treat this as a buy-and-hold vehicle, it will eat itself up in your portfolio. It’s a short-term trading vehicle only. Obviously, nothing is further from financial advice than what I just said.