U.S. Analysis

Bottom line:

The BEA just released a very strong reading for Q3 GDP, reporting a full percentage point above consensus at 4.3% suggesting that the US economy was in good shape over the summer (despite labor market weakness). Personal consumption surprised to the upside, along with a jump in exports and a rebound in government spending. Final sales to private domestic purchasers (FPDP) – a measure closely watched by the Fed – continued to paint a picture of a robust domestic economy – it accelerated in Q3 to 3.0% (up from 2.9% in Q2).

While the headline number is impressive, we know that volatile measures like trade and inventories can cause massive swings and are often subject to revisions, so we are careful not to draw conclusions prematurely. Still, the underlying momentum of FPDP signals the economy was on stable footings ahead of the shutdown. Looking ahead, we are watching for signs of slowing consumer momentum and weaker government spending in Q4 as a result of the shutdown. And importantly, we continue to monitor the pace of inventory rebuild, which will see a bigger impact from tariffs moving forward.

Here’s what stood out in this morning’s Q3 GDP Report:

• We saw a massive uptick in services sector consumption (+3.7% at a QoQ annualized pace) compared to the +2.5% increase that we had assumed. Services sector consumption added +1.7 percentage points to headline growth. Looking under the hood, spending on health care and recreation services move up meaningfully alongside “other services.” Interestingly, we saw a pullback in the pace of growth for food services and accommodation spending. Spending on nondurables ramped up +3.9%, as expected, with groceries contributing meaningfully. Durable goods spending ramped up unexpectedly, +1.9%, entirely attributed to recreational goods and vehicle spending.

• Spending on national defense supported government spending in Q3. But we will not see support to Q4 growth from government spending, since the government shutdown meant federal contracts were not paid for October and part of November.

• Business Investment added 0.4 ppts to headline growth. Information processing equipment and intellectual property products still provided strong support but scaled back from what we saw in Q2. Residential investment – still stuck from stagnant long-end rates – continued to weigh on overall growth, as expected.

• Exports ramped up +8.8% in Q3 alongside weaker imports. The improved trade picture added +1.6 percentage points to headline growth – which is nearly in-line with the boost from services sector consumption.

• We continued to see a drawdown of inventories in Q3, suggesting that we are still likely a few quarters away from peak tariff passthrough since businesses are still drawing down pre-tariff inventories accumulated in Q1.

On inflation:

• This morning’s GDP price index also posted a massive upside surprise (+3.8% QoQ vs. +2.7% expected). While we are most focused on real GDP growth (above), which was exceptionally strong, firmer-than-expected price growth paints a worrying picture ahead of tariff passthrough. Still, accelerating growth in Q3 alongside price pressures continues to support our view that high income consumers are driving spending.

---

---

About the Authors

Mike Reid is a Senior U.S. Economist at RBC. He is responsible for generating RBC’s U.S. economic outlook, providing commentary on macro indicators, and producing written analysis around the economic backdrop.

Carrie Freestone is an economist and a member of the macroeconomic analysis group. She is responsible for examining key economic trends including consumer spending, labour markets, GDP, and inflation.

Imri Haggin is an economist at RBC Capital Markets, where he focuses on thematic research. His prior work has centered on consumer credit dynamics and treasury modeling, with an emphasis on leveraging data to understand behavior.

---