The US economy has delivered a powerful surprise, growing at its fastest clip in two years despite facing headwinds from elevated interest rates and a cooling labour market. The latest data forces a fundamental question: are analysts using the wrong rulebook to understand this expansion?
The Growth That Defies Gravity
According to the latest report, US gross domestic product (GDP) rose at a 4.3% annualised pace in the third quarter. This figure not only exceeded consensus forecasts but also marked the biggest economic expansion in two years. The strength is puzzling because it comes alongside still-high inflation, trade disruptions, and a labour market that appears to be losing steam.
Past quarters saw economists explaining away robust numbers as temporary or distorted. However, the consistent improvement suggests a deeper shift. While unusual trade dynamics—with exports surging 8.8% and imports falling 4.7%—provided a temporary boost, the core of the growth story is domestic demand.
A key measure, real final sales to private domestic purchasers, which excludes volatile trade and inventory swings, rose by a solid 3%. Underpinning this was consumer spending, which grew at a 3.5% pace, significantly stronger than in the first half of the year. Business investment also increased, led by spending on equipment and intellectual property.
The Puzzle of Jobs vs. Output
One of the most confounding aspects of the current expansion is the growing gap between economic output and job creation. Payroll growth has slowed, and the unemployment rate has recently touched its highest level in over two years. Traditionally, this signals an economy running out of steam.
Yet, GDP is accelerating. Experts point to two primary explanations. First, a potential surge in productivity, driven by capital-intensive investment in technology and artificial intelligence. This boosts output without requiring a proportional increase in hiring. Second, the reality of a K-shaped economy, where higher-income households, less sensitive to interest rates, continue to drive consumption.
"A closer look at the data shows the K-shaped economy at work," said Joe Brusuelas, chief economist for RSM US. He noted that household consumption by higher-income consumers and AI-related investment accounted for nearly 70% of the quarter's total growth, explaining why public sentiment, especially among lower-income groups, remains subdued.
Can the Momentum Last Into 2026?
Several factors suggest the economy could continue outperforming expectations into the next year. Favourable business tax provisions set to take effect in 2026 will further incentivise capital investment. Companies are already pouring funds into automation, data centres, and AI infrastructure.
Rising asset prices, including steady equity markets and resilient home values, have rebuilt a wealth effect that supports spending among affluent households. Furthermore, as Charles Lieberman of Advisors Capital pointed out, nearly flat inventories imply future growth may even get a boost from restocking needs.
However, risks loom. Stubbornly elevated inflation remains a critical concern, with the Fed's preferred gauge, the core PCE price index, rising faster than expected in Q3. This could force the Federal Reserve to reconsider its rate-cut trajectory. A sharp correction in tech stocks could tighten lending conditions and hurt the spending power of wealthier households, who own a disproportionate share of assets.
Trade is another wild card. While a recent US-China deal provides near-term tariff certainty, ongoing negotiations throughout 2026 could reignite volatility if they falter, according to Adrian Helfert of Westwood.
For now, the US economy keeps beating expectations. If it can sustain strong output with modest job growth, powered by investment and productivity, then policymakers and forecasters may need to fundamentally rethink their definitions of overheating and economic success. The central question for 2026 may not be about a cooling economy, but about whether our frameworks to understand it are still valid.
