In a surprising turn, the United States economy recorded its strongest growth in nearly two years, expanding at an annual rate of 4.3% in the quarter ending September 2025. This figure, delayed by a government shutdown, significantly surpassed the anticipated 3.2% growth, defying concerns over the impact of President Donald Trump's trade policies and rising inflation.
The Three Pillars of Unexpected Growth
The robust expansion was propelled by three primary factors. First, consumer spending grew at a 3.5% annual rate, up from 2.5% in the previous quarter. This resilience came even as the job market showed signs of slowing, with increased household expenditure noted in healthcare and elderly care services.
Second, the trade balance provided a significant boost. A decline in imports, influenced by existing tariff barriers, coupled with a 7.4% rebound in exports, led to a surge in net exports. Third, government spending recovered, bolstered notably by higher defence outlays.
Headwinds on the Horizon: Inflation and Stagnant Incomes
Despite the strong headline number, analysts warn of underlying vulnerabilities. The gains from trade and defence largely offset weaknesses elsewhere, particularly a pullback in spending by lower-income households facing higher prices and a slowdown in the housing market due to elevated interest rates.
A critical concern is inflation. The personal consumption expenditures price index, a key inflation gauge, jumped to 2.8% in the September quarter from 2.1% previously. This surge in prices, alongside a sluggish labour market and stagnant real incomes, is expected to dent consumer spending going forward.
President Trump credited his tariff policies for the growth, but economists caution that the effects are complex. While the AI boom has temporarily masked some tariff impacts, tariffs are expected to gradually fuel inflation further. Additionally, any downturn in the AI-driven stock market could remove a key support for economic sentiment.
Implications for India: A Silver Lining Amid Tariffs
For India, a growing US economy traditionally spells good news through heightened demand for exports and steady remittance flows. Recent data for November showed a sharp increase in Indian shipments to the US, both direct and indirect, despite high tariffs.
This growth is concentrated in sectors like pharmaceuticals and electronics, which have largely escaped the tariff net so far. Interestingly, sectors such as gems and jewellery also recorded a noticeable surge, indicating resilient trade channels.
Looking ahead to 2026, potential tailwinds for the US include extended tax cuts and the Federal Reserve's interest rate cuts under Chairman Jerome Powell. However, the consensus is that the current pace of growth will be difficult to sustain. The combined pressures of inflation, a weakening labour market, and the delayed bite of trade policies pose significant challenges to the world's largest economy, with ripple effects for global partners like India.
