Weekly Update 12/24/2025: US Third Quarter Gross Domestic Product (GDP) Comes in Better Than Expected
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Domestic Economic News
The US economy expanded in the third quarter at the fastest pace in two years, bolstered by resilient consumer and business spending and calmer trade policies. Inflation-adjusted gross domestic product, which measures the value of goods and services produced in the US, increased at a 4.3% annualized pace, a Bureau of Economic Analysis report showed Tuesday. That was higher than all but one estimate in a Bloomberg survey and followed 3.8% growth in the prior period. The BEA was originally due to publish an advance estimate of GDP on Oct. 30 but the report was canceled due to the government shutdown. The agency typically releases three estimates of quarterly growth — fine-tuning its projections as more data comes in — but it will only release two for the period leading up to the longest shutdown on record. The delayed report card shows the economy maintained momentum through the middle of the year as consumers powered ahead and the most punitive of President Donald Trump’s tariffs were rolled back. While the shutdown is expected to weigh on fourth-quarter growth, economists expect a modest rebound in 2026 when households receive tax refunds and an anticipated Supreme Court ruling may strike down Trump’s sweeping global tariffs.
The Federal Reserve’s latest projections echo that sentiment, with Chair Jerome Powell citing supportive fiscal policy, spending on AI data centers and continued household consumption as reasons for the central bank’s forecast for faster growth next year. Policymakers are projecting just one interest-rate cut in 2026 after three straight reductions to end this year. Part of the reason for some officials’ hesitation to lower borrowing costs much more is because inflation remains above their 2% target. The report showed the Fed’s preferred inflation metric — the personal consumption expenditures price index, excluding food and energy — rose 2.9% in the third quarter. The BEA has yet to reschedule the October or November monthly PCE data.
Consumer spending — the main growth engine of the economy — advanced at a 3.5% annualized pace. That reflected solid outlays on services, including health care and international travel. Spending on motor vehicles fell. However, a softer labor market and high cost of living represent hurdles for the consumer in 2026. That combination has created a more notable divide in household spending by income. Business investment expanded at a 2.8% rate, driven by another strong quarter for outlays on computer equipment. Investment in data centers, which house the infrastructure for AI, climbed to a fresh record. Separate data Tuesday showed US orders for business equipment fell by more than forecast in October. Non-defense capital goods shipments including aircraft, which feed directly into the equipment investment portion of GDP, were stronger than expected, indicating some momentum headed into the fourth quarter. Net exports added about 1.6 percentage points to GDP growth after seesawing in the first half of the year. Goods and services that aren’t produced in the US are deducted from the GDP calculation but counted when consumed. Inventories and residential investment both weighed on growth in the third quarter. Because swings in trade and inventories have distorted overall GDP this year, economists are paying closer attention to final sales to private domestic purchasers, a narrower metric of consumer demand and business investment. This measure climbed 3%, the most in a year.
The government’s other main gauge of economic activity — gross domestic income — rose 2.4% after a revised 2.6% annualized advance in the second quarter. Whereas GDP measures spending on goods and services, GDI measures income generated and costs incurred from producing those same goods and services. The report includes fresh figures on corporate profits, which rose 4.2% in the third quarter, the most this year. A measure of after-tax profits for nonfinancial firms as a share of gross value added — a proxy for margins — has tightened this year, though remains well above levels that prevailed from the 1950s to the pandemic. The next and final estimate of third-quarter GDP will come out on Jan. 22. The BEA has yet to determine a new date for its initial fourth-quarter and full-year 2025 estimates, which were originally due Jan. 29. The agency said it won’t have “sufficient” data by then.
US consumer confidence declined for a fifth consecutive month on more pessimistic views of the labor market and business conditions. The Conference Board’s gauge decreased to 89.1, from 92.9 last month, data out Tuesday showed. The falling streak is now tied for the longest since 2008. A gauge of present conditions sank to 116.8, the lowest since February 2021, while a measure of expectations for the next six months held steady in December. The impact of high prices and concerns about the labor market have weighed on consumers all year, keeping the index stuck around some of the lowest levels since the pandemic. Job growth is sluggish, unemployment is rising and inflation remains above the Federal Reserve’s target. Economists project that hiring will remain tepid next year and the unemployment rate will show little improvement, which could continue to weigh on confidence. They also anticipate wage growth will cool further in 2026, which stands to propel a divide in spending by income.
Interest Rate Insight and the Fed
The following is a compilation of recent policy statements from members of the Federal Reserve since their last meeting: Stephen Miran, Fed Governor said on Bloomberg TV: “If we don’t adjust policy down, then I think that we do run risks. The unemployment rate has poked up potentially above where people thought it was going to go. And so we’ve had data that should push people into a dovish direction." John Williams, President of New York Fed said in a CNBC interview: “I don’t personally have a sense of urgency to need to act further on monetary policy right now, because I think the cuts we’ve made have positioned us really well. “I want to see inflation come down to 2% without doing undue harm to the labor market. It’s a balancing act.” Austan Goolsbee, President of Chicago Fed said in a Fox Business interview: He lauded the November inflation report, which showed a cooling in price pressures, saying it contained a “lot to like.” He said he would be comfortable lowering rates “a fair bit” if employment remains stable and inflation is on a path to the Fed’s goal. Christopher Waller, Fed Governor said in a CNBC forum: “Because inflation is still up, we can take our time — there’s no rush to get down. We just can steadily, kind of bring the policy rate down towards neutral.” Raphael Bostic, President of Atlanta Fed said in a published essay: “After wrestling with all the considerations, today I continue to view price stability as the clearer and more pressing risk despite shifts in the labor market. I see little to suggest that price pressures will dissipate before mid to late 2026, at the earliest, and expect inflation to remain above 2.5% even at the end of 2026.” Susan Collins, President of Boston Fed said in a LinkedIn post: She said she supported last week’s rate reduction, but the decision was a “close call” because she remains concerned about elevated inflation. She added that “with nearly five years of elevated inflation, I remain concerned about potential inflation persistence.” As of the time of our writing of this on Christmas Eve, it remains uncertain as to the timing of future interest rate cuts. As Chair Powell is fond of saying, it will depend on the incoming data.
Impactful International News
Germany’s economic rebound next year seems a little bit less assured. The government’s fiscal expansion is expected to deliver growth, but doubts have crept in over the strength of domestic demand, according to the latest Bloomberg News survey. By contrast, economists appear more optimistic on exports than they did in the summer. The Bloomberg forecasts in the survey sit near the lower end of the range, mainly because they anticipate activity will be more subdued in the first half of 2026. In other European news, rate cuts by the European Central Bank have made it cheaper for France to borrow at shorter maturities than at longer ones. The maturity profile of new issuance has already shifted in that direction, capturing part of the benefit. Bloomberg estimates that a more aggressive tilt toward short-term debt could save the Treasury up to €18 billion by 2034 — a modest but non-negligible sum. That said, the strategy comes at a cost. Debt-servicing expenses would become more sensitive to changes in the monetary-policy outlook, rollover risk would rise, and attempts to exploit the term structure could themselves trigger a material repricing of the yield curve. Japan has a “free hand” to take bold action against currency moves that are not in line with fundamentals, Finance Minister Satsuki Katayama said, in her strongest warning yet to speculators following the yen’s weakening even after a rise in interest rates. “The moves were clearly not in line with fundamentals but rather speculative,” Katayama said in an interview with Bloomberg on Monday, referring to a sharp weakening of the yen on Friday. “Against such movements, we have made clear that we will take bold action, as stated in the Japan–US finance ministers’ joint statement,” she said. The Japanese currency strengthened after Katayama’s remarks, dipping below 157 yen per US dollar. The yen was around 156.30 Tuesday lunchtime in Tokyo after continuing to gain. While hinting at the possibility of direct currency intervention, Katayama also touched on the likelihood of Japan’s financial predicament worsening over the short term as Prime Minister Sanae Takaichi’s government pushes for stronger economic growth, another key focus for investors. Katayama’s remarks come amid renewed speculation that her ministry might intervene in the currency market after the yen weakened following a heavily telegraphed move by the Bank of Japan to hike borrowing costs to the highest level in 30 years. BOJ Governor Kazuo Ueda’s remarks at a post-decision briefing helped trigger a slide in the currency as he left some market players disappointed that he didn’t give a stronger message on raising rates again.
Company Events
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