The U.S. economic system grew at a 4.3% annual fee within the third quarter, blowing previous economists’ expectations and delivering the type of headline that indicators energy heading into the brand new 12 months. Shoppers went on an unusually robust spending tear whereas companies cinched $166 billion in capital positive factors. President Donald Trump and his group wasted no time celebrating, taking a victory lap over these dour economists who had warned of doom and gloom, declaring the “Trump economic golden age is FULL steam ahead.”
Nicely, decelerate, these dour economists replied. There’s one thing lacking on this increase: the roles. Hiring this 12 months, at finest, has stalled, and at worst has collapsed: unemployment has climbed to 4.6%, and even Fed Chair Jerome Powell has warned current information could also be overstating job positive factors.
That is the puzzle economists at the moment are making an attempt to reconcile. In a typical restoration, robust GDP development exhibits up first in hiring, then in paychecks, and at last in client spending. However on this quarter, it’s reversed: spending is right here with out jobs. So how does an economic system develop at a 4.3% annual fee when households aren’t really incomes extra, and actually, nonetheless preventing sticky inflation?
“I’ve never seen anything like it,” KPMG’s chief economist Diane Swonk instructed Fortune. “To have this stagflation in the inflation and unemployment rate, and to not have it in growth is highly unusual, and something’s got to give.”
A story of two economies
There are two components of the story of how the economic system arrived right here. The primary is that households are spending with out earnings development. Actual disposable earnings was primarily flat within the third quarter—actually 0% development. People didn’t acquire buying energy. But, they made up the distinction by means of financial savings drawdowns, credit score, or by absorbing prices they can’t keep away from. The GDP report itself factors to the place that strain is concentrated: largely in companies, and inside companies, healthcare was a number one driver.
People spent probably the most on healthcare final quarter for the reason that Omicron wave of 2022, Swonk mentioned. Outlays on outpatient care, hospital companies, and nursing amenities rose at one of many quickest paces in years, reflecting ageing demographics and better medical costs, but additionally the rising use of pricey GLP-1 weight-loss medication, which proceed to push up spending even after adjusting for inflation.
This was not a basic discretionary splurge, then. It was spending households had little skill to defer. That distinction issues, as a result of spending pushed by necessity behaves very in a different way from spending pushed by rising paychecks. When households are paying extra for healthcare, insurance coverage, baby care, or elder care, they aren’t signaling confidence; slightly, they’re absorbing strain. And with actual disposable earnings flat, these prices usually are not being met by wage development, however by thinner financial savings and deferred selections elsewhere, Swonk mentioned.
The issue, then, is when that strain eases in early 2026 as tax refunds surge and withholding modifications put additional cash briefly again into paychecks, the enhance may act as a “sugar high”: a short-term carry to spending that doesn’t repair the underlying downside of weak job creation and stagnant actual earnings.
“We will feel more broad-based gains as we get into 2026,” Swonk mentioned, “but at what price?”
The priority, she added, is that stimulus layered on prime of already elevated service-sector inflation may make worth pressures “stickier,” not relieve them.
The second a part of the story—and the one most Fortune readers will already acknowledge—is that this economic system is now not shifting as a single system. It’s splitting right into a “K-shape,” and what seems like resilience on the prime more and more masks fragility beneath.
The GDP report makes that divergence laborious to overlook. Alongside surging client spending, company earnings from present manufacturing jumped by $166 billion within the third quarter, a dramatic acceleration from the prior interval. On the similar time, funding fell, led by a pointy drawdown in personal inventories as companies removed their pandemic-era hoarding. Companies usually are not broadly increasing capability, or hiring aggressively, and even hiring in any respect. They’re extracting margins, managing prices, and in lots of circumstances ready. They’ve discovered the best way to develop with out hiring, Swonk mentioned.
“We are seeing most of the productivity gains we’re seeing right now as really just the residual of companies being hesitant to hire and doing more with less,” she mentioned. “Not necessarily AI yet.” In different phrases, companies are squeezing output from a set or shrinking workforce, not increasing payrolls to fulfill new demand.
The Okay-shaped economic system, totally matured
On one facet of that Okay are prosperous households and asset holders, whose spending continues to be supported by robust fairness markets in jubilation after an historic 12 months of AI spending, elevated house values, and company revenue development. On the opposite facet are employees and lower- and middle-income households, whose spending, as already talked about, is more and more formed by constraint slightly than confidence, accounting for the constant “affordability crisis.” The headline GDP quantity combines each teams right into a single determine, however the lived economic system doesn’t.
Swonk famous that leisure companies—journey, leisure, premium experiences—stay a vivid spot, however are overwhelmingly carried by higher-income households. Even there, the info reveals stress beneath the floor. Trip exercise in August, she mentioned, was the second-lowest on file for that month, trailing solely August 2020. Airways and resorts are nonetheless filling premium seats, however that demand is more and more concentrated on the prime.
The hazard, Swonk argued, is that these two engines behave very in a different way over time. Spending supported by asset appreciation can persist so long as markets cooperate. Spending pushed by necessity, nonetheless, can not.
“When you’re carrying an economy by wealth effects and affluent households, as opposed to employment gains and generating new paychecks, you’re vulnerable if there’s any correction in equity markets,” Swonk mentioned. She described how rapidly that channel can reverse: foot site visitors slows, discretionary spending pulls again, and high-end demand evaporates far quicker than headline GDP information would recommend.
“When you divorce growth from employment gains, you’ve got a problem,” Swonk mentioned. “And this is before the real effects of AI have even set in.”
