U.S. GDP Surges 4.3% in Q3 as Shutdown Distorts Data and Inflation Reaccelerates

The U.S. economy grew at a much faster pace than expected in the third quarter of 2025, even as a historic federal government shutdown scrambled the flow of data that normally underpins such estimates.

Real gross domestic product, the broadest measure of goods and services produced in the country, rose at an annual rate of 4.3% from July through September, the Bureau of Economic Analysis said Dec. 23. That was up from a revised 3.8% in the second quarter and the strongest quarterly growth in about two years.

The report also showed a sharp rebound in corporate profits and a re-acceleration in inflation, raising fresh questions for the Federal Reserve as it tries to guide the economy to a so-called soft landing—slowing price increases without tipping the country into recession.

The figure arrived with an unusual label: “Gross Domestic Product, 3rd Quarter 2025 (Initial Estimate) and Corporate Profits (Preliminary).” Because the federal shutdown in October and early November forced BEA to halt operations, the agency skipped its usual “advance” and “second” estimates. Instead, it released a single initial report less than two weeks before year’s end.

“Due to the recent government shutdown, this initial report replaces the release of the advance estimate originally scheduled for October 30 and the second estimate originally scheduled for November 26,” the agency said.

BEA plans an updated estimate, including GDP by industry and revised corporate profits, for Jan. 22.

Strong growth, hotter prices

The third-quarter gain equates to roughly 1.1% growth from the previous quarter, after adjusting for inflation. On another key measure, real gross domestic income rose at a 2.4% annual rate. BEA often highlights the average of the two, which grew 3.4%.

The pickup in output was driven primarily by consumers, trade and government spending.

Household spending, which accounts for about two-thirds of U.S. economic activity, rose at a 3.5% annual rate, up from 2.5% in the second quarter. Outlays on services led the way, particularly health care, travel and professional and legal services. Purchases of recreational goods and information processing equipment also increased, as did spending on prescription drugs.

Exports climbed, including shipments of capital goods and certain consumer goods, while imports fell—especially in nondurable consumer products. Because imports are subtracted from GDP, that decline added to overall growth. Government spending at the federal, state and local levels also rose, with federal gains led by defense outlays.

Private investment was the main drag but less so than earlier in the year. Overall investment edged down at a 0.3% rate, a sharp improvement from a 13.8% plunge in the second quarter. Businesses continued to draw down inventories in wholesale trade and manufacturing after stockpiling earlier in 2025 amid tariff uncertainty and the looming shutdown. Underlying fixed investment, including equipment and intellectual property products, posted a modest gain.

At the same time, inflation pressures picked back up.

The price index for gross domestic purchases, which measures prices paid by U.S. residents, rose at a 3.4% annual rate in the quarter, up from 2.0% in the spring. The personal consumption expenditures (PCE) price index, the Federal Reserve’s preferred gauge, increased at a 2.8% rate, with the core measure that excludes food and energy up 2.9%. Both were higher than in the previous quarter and remained above the Fed’s 2% target.

Profits jump as job growth slows

The GDP report showed corporate profits from current production rising $166.1 billion in the third quarter, to about $4.1 trillion at a seasonally adjusted annual rate. That compared with a $6.8 billion increase in the second quarter.

Profits of domestic industries rose $115.8 billion, split between financial corporations, up $47.5 billion, and nonfinancial corporations, up $68.3 billion. Profits from the rest of the world—U.S. firms’ earnings abroad net of payments to foreign owners—increased $50.2 billion.

The rebound in profits came even as BEA recorded the effects of major legal settlements that counted against corporate income in its accounts. The agency cited a $2.8 billion settlement by a domestic health insurer over alleged antitrust violations and a $2.5 billion settlement by a U.S. e-commerce company with the federal government over deceptive enrollment practices. In national accounts, such payments are treated as business current transfer payments, which reduce measured profits but do not change total income.

The profit bounce and strong GDP figures contrasted with a softer labor market. By late 2025 the unemployment rate had risen to about 4.6%, its highest level in roughly four years, and job gains had slowed markedly from earlier in the expansion. Economists described a pattern in which many firms, facing uncertainty over trade policy, future shutdown risks and the impact of artificial intelligence, were reluctant to add staff even as earnings improved.

Shutdown left policymakers flying partly blind

The strong growth reading follows a 43-day government shutdown that began Oct. 1 after Congress failed to agree on full-year funding for the 2026 fiscal year. The impasse between the Republican-controlled House and Democratic-controlled Senate shuttered large parts of the federal government and furloughed an estimated 900,000 employees.

The Bureau of Economic Analysis said at the time it was required to suspend operations, including “any economic data release that had been scheduled to occur while the federal government is shut down.” The September GDP, income and trade data that usually feed into the late-October advance estimate for third-quarter growth were delayed or unavailable, forcing BEA to compress what is normally a multi-stage process into a single estimate.

The Bureau of Labor Statistics, which produces employment and consumer price figures, also postponed and scaled back releases. There was no October household employment survey, and the October consumer price index was not produced; in some internal systems, September data were carried forward as placeholders. November data were collected and released under modified procedures.

Those disruptions meant that when Federal Reserve policymakers met on Dec. 10, they were making decisions with fewer than usual data points on jobs and inflation—and without any official reading on third-quarter GDP.

A test for the Fed’s soft-landing strategy

On Dec. 10, the central bank reduced its benchmark federal funds rate by a quarter percentage point to a target range of 3.5% to 3.75%, its third consecutive cut after a series of earlier increases aimed at taming post-pandemic inflation. Officials cited signs of a cooling labor market alongside inflation that, while lower than its 2022 peak, remained above 2%.

In its Summary of Economic Projections released that day, the Fed’s median forecast called for real GDP to grow 1.7% from the fourth quarter of 2024 to the fourth quarter of 2025, with the unemployment rate rising to around 4.5% and PCE inflation at 2.9% for the year before easing toward 2% over the medium term. The projections implied a gradual path of further rate reductions and envisioned a glide path back to price stability without a recession.

The 4.3% third-quarter GDP figure far outpaced that full-year growth projection and came in above most private forecasts, which had been around 3.2% to 3.3%. With core PCE inflation running near 3% and showing some acceleration from the second quarter, the data complicated the case for continued, rapid rate cuts.

Fed Chair Jerome Powell has argued that gains in productivity, partly tied to advances in technology, could allow the economy to grow faster without reigniting the kind of inflation seen earlier in the decade. “If productivity is higher, then the economy can grow more quickly without generating inflation,” he said in a speech earlier in 2025.

The new GDP numbers provide support for the view that output can expand briskly even as inflation trends down from its peaks, but they also highlight the risk that easing policy into stronger-than-expected growth could slow progress on prices.

Politics, perceptions and the year ahead

The White House seized on the report as validation of its economic agenda. President Donald Trump claimed on social media that tariffs were responsible for “great USA economic numbers” and asserted there was “NO INFLATION.” Official figures show inflation running below earlier highs but still close to 3% on the Fed’s preferred measure.

Opposition lawmakers pointed instead to the shutdown’s economic and administrative costs, the uneven jobs picture and rising household anxiety. Public opinion surveys late in the year found many Americans skeptical of the administration’s trade policies and pessimistic about their own finances despite strong aggregate indicators and stock indexes near records.

The disconnect between robust top-line growth and more subdued gains in employment and wages leaves policymakers with a complicated picture as 2026 begins. BEA’s updated estimate later this month may revise the third-quarter figures up or down, and additional data on jobs and prices will clarify whether the late-2025 surge marks the start of a stronger expansion or a high point before conditions cool.

For now, the numbers suggest an economy that has defied predictions of imminent recession but is still working through the aftershocks of high inflation, aggressive rate hikes and political brinkmanship over basic government funding—a soft landing, perhaps, but one resting on unusually shaky ground.