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The government shutdown delayed the third-quarter GDP release, but signs suggest that growth was robust, around 3%. Consumer spending on electric vehicles before the EV tax credit ended on September 30, plus the continuing ramp-up in business spending on artificial intelligence, will have supported third-quarter growth, despite continued weakness in housing, nonresidential construction and government spending.
Fourth-quarter growth should be weak. Consumer and business spending will pull back to some degree, after they rose earlier in the year to get ahead of tariffs. Motor vehicle sales in particular will come in lower, given the surge in the third quarter. Of course, government spending will be affected by the federal shutdown. Now that the shutdown has ended, we expect that government employees will receive back pay, but government contractors will not, unless they were on previously funded projects. But one positive is that strong stock market gains this year should keep wealthier consumers spending.
Sub-2% growth is here to stay for a while. Total annual growth for 2025 will be around 1.8%, because the annual growth figure is measured from 2024’s midpoint through mid-2025. We expect this sub-2% trend to continue through 2026 and 2027.
Trade deals with various countries have reduced the uncertainty that exporters and importers face, but if businesses can now plan better, they may pass on more of their tariff costs to customers. The effective tariff rate on imports is now around 15% across all goods. Higher rates are being imposed on commonly imported items, such as home furnishings, toys, sports equipment and the like, but they have not had a large impact on the Consumer Price Index yet. Price increases on motor vehicles will likely be coming later in the year as inventories of pretariff imported vehicles run low.
Tariffs will not cause a broader recession in the economy. Consumer sentiment is still low, though much more so among Democrats and independents than among Republicans. The Trump administration has not only been cutting federal employees, but also canceling contracts that sustain government contractors, nonprofits and universities. The ripple effect of canceled contracts beyond government agencies is unknown, but potentially high. Consumers will likely begin to save more because of slowing in the labor market. Foreign tourism has been down as well, perhaps subtracting a tenth of a point from GDP growth over the course of the year.
Source: Department of Commerce: GDP Data
