U.S. economic momentum surges

After a delay tied to the government shutdown the Bureau of Economic Analysis delivered a standout update: U.S. gross domestic product (GDP) surged at a 4.3% annualized pace in 2025’s third quarter. That quarter built on momentum, accelerating from a 3.8% annualized growth in the second quarter following a modest first quarter decline. Consumers led the charge, while exports improved relative to imports as trade deals reduced some tariff uncertainty. ¹

The consumer continues to anchor the expansion and has powered the stronger activity of the past two quarters. Spending strengthened across both services and goods, while federal government spending also rebounded in the third quarter after contracting earlier in 2025 and ahead of October 1 federal government shutdown. On a year-over-year basis, GDP grew 2.3% in the third quarter, up from 2.1% in the second quarter – steady progress that reinforces the broader growth story. ²

“Consumer resilience in the wake of tariff uncertainty continues to lead GDP growth,” says Rob Haworth, senior investment strategy director with U.S. Bank Asset Management Group. That resilience matters because it shows up not only in headline GDP, but also in the day-to-day signals investors watch for momentum shifts. When consumers keep moving, the economy continues to expand, even amid policy and trade headlines.

Consumer spending: Engine stays on

In the third quarter, consumer spending, as measured by Personal Consumption Expenditures (PCE), rose at a 3.5% annualized rate. That marks a clear step up from 2.5% annualized in the second quarter and 0.6% in the first quarter, signaling renewed traction after a soft start of the year. ² “Solid labor markets and wage growth enable consumers to maintain spending,” notes Haworth.

Labor market signals still look supportive, even as they send mixed messages beneath the surface. Low initial weekly jobless claims suggest corporate layoffs remain limited, which helps households feel secure enough to keep spending. At the same, time, recent non-farm payroll figures and revisions point to weaker hiring, while stable wage growth continues to support purchasing power. ³ This “cooling but not cracking” combination creates a backdrop that can extend the cycle if it persists.

What’s ahead for consumers?

Because consumer spending makes up nearly 70% of U.S. GDP, it remains the swing factor for whether growth stays durable. ¹ A key question is straightforward: can households maintain today’s pace and keep the expansion on track? That question matters across the investment spectrum – from day-to-day market sentiment to longer-term portfolio positioning.

Bill Merz, head of capital markets research for U.S. Bank Asset Management Group, strikes a more cautious tone. “Data shows that high interest rates and higher costs are pressuring lower income and some middle-income consumers.” In other words, the overall consumer picture still looks healthy, but the burden does not land evenly – and that unevenness can influence what parts of the economy accelerate or slow.

Consumer spending underscores both the momentum and the moderation. U.S. retail sales rose 3.5% in October versus year-ago levels, but the pace softened amid the U.S. federal government shutdown after stronger summer months. ⁴ “Consumers are hanging on and weighing how inflation will impact their buying decisions,” says Haworth. For investors, that line captures the current setup well: households keep participating, but they do it with sharper price awareness and more selective trade-offs.

Trade policy adds another layer to watch, even if it hasn’t fully reshaped behavior yet. President Donald Trump's tariff policy has had a modest impact on consumers so far, as some new tariffs hit key trading partners while the President delayed many of his proposed tariffs. Even so, the economic impact remains uncertain, and uncertainty can change how businesses plan and how consumers feel. That risk premium can show up in pricing decisions, investment spending, and ultimately market volatility.

“As companies start feeling effects of tariffs, their strategic decisions could drive costs higher,” says Haworth. “Are companies bearing those costs and reducing profit margins? Are they passing costs on to consumers, potentially boosting inflation? Or are they pushing suppliers to absorb the costs?” Those questions sit at the center of the inflation outlook, because cost pass-through can ripple from corporate earnings to consumer budgets and ultimately to Federal Reserve (Fed) policy.

In spite of solid growth, the Federal Reserve restarts interest rate cuts

The Fed delivered an interest rate cut at its December meeting, marking the its third, 2025 rate cut. The Fed also cut rates by 1% in late 2024. Fed Charman Jerome Powell, whose term expires in May 2026, stressed that policy will remain data dependent and reiterated that the path ahead is “far from” a foregone conclusion. ⁵ The Fed’s latest Summary of Economic projections (December 2025) lifted the median 2025 and 2026 GDP growth forecast while lowering inflation expectations, ⁶ and economists have raised growth forecasts for 2025 and 2026 in recent weeks, according to Bloomberg.

Markets suggest the Fed may pause in the near term. The Fed will revisit rates at its January 27-28, 2026 meeting, and market pricing implies another cut is unlikely at that meeting. ⁷ Looking further out, markets indicate the Fed could deliver two or three quarter point cuts in 2026, a path that would influence borrowing costs such as auto loans and home mortgages. For many investors, that expected glid path matters as much as the next decision, because it shapes how markets price future growth, inflation and earnings power.

Merz points to labor market nuance as a meaningful driver behind recent Fed decisions. He notes that labor market weakness played a larger role recently, though the committee may now balance inflation and labor market indicators more evenly. “Negative labor market revisions indicate softer hiring over the last year and a half, but consumer spending remains solid,” says Merz.

Implications for investors

Economic strength throughout 2025 helped many companies meet or exceed earnings expectations and the S&P 500 generated double digit total returns for the third consecutive year. ⁸ Haworth expects the earnings outlook to remain favorable in 2026 and frames the moment this way: “Economic growth appears sufficient to keep the market buoyant, though likely with a degree of volatility.” That combination – constructive fundaments with pockets of volatility – often rewards investors who stay diversified and remain clear on their time horizon.

Markets also offered a reminder of how quickly sentiment can shift within a strong year. The S&P 500 fell 19% through early April, then rebounded to post a total return of nearly 18% in 2025, as investors reacted to moderate inflation t and improving corporate profits. ⁸ Those swings highlight why process matters: even in solid years, the path rarely moves in a straight line.

Consider reviewing your current portfolio with your wealth management professional to determine confirm it still aligns with your long-term goals and today’s evolving market environment.

Note: Diversification and asset allocation do not guarantee returns or protect against losses. The Standard & Poor’s 500 Index (S&P 500) consists of 500 widely traded stocks that are considered to represent the performance of the U.S. stock market in general. The S&P 500 is an unmanaged index of stocks. It is not possible to invest directly in the index. Past performance is no guarantee of future results.