U.S. GDP Growth Looks Strong, But Here’s What Matters More
The latest U.S. GDP numbers brought a ‘wow’ factor with them.
At the headline level, the number was by all accounts impressive. Real GDP grew at a 4.3% annualized pace in Q3 20251, up from 3.8% in the second quarter and well above expectations that growth would decelerate to 3%. On its face, the economy clearly regained some momentum.
For investors, though, the read on GDP data lies less in the headline and more in the details beneath the surface. You must also remember that markets priced-in the growth long ago, so the print is more about confirming last year’s market strength being grounded in solid fundamentals. There are also signposts in the data that can tell us what to look for in 2026.1
The clearest area of strength remains the consumer. Personal consumption expenditures grew at a 3.5% annualized rate in the third quarter, up from 2.5% in Q2 and just 0.6% in Q1. Given that consumer spending accounts for roughly 68% of U.S. GDP, this acceleration did much of the heavy lifting for headline growth. That’s a critical point, as it reinforces the view that households have remained willing and able to spend despite policy uncertainty.
Business investment is the factor I think investors should focus on the most heading into the new year. Nonresidential fixed investment slowed to a 2.8% annualized pace in Q3, down from 7.3% in the prior quarter. Residential investment declined for a second consecutive quarter, falling 5.1%. Together, these figures offer a different narrative than the one we see with U.S. households in aggregate. Companies are not pulling back aggressively, but they are also not leaning into expansion. Whether this slowdown in investment proves temporary or persistent will be an important signal as 2026 begins.
Government spending also contributed to Q3 growth, adding roughly 0.4% to the headline figure. That increase was driven largely by national defense spending and state and local outlay, the former of which could be a meaningful factor in 2026. Military expenditures rarely move in isolation, and they often coincide with heightened uncertainty elsewhere in the global system.
Enter the Venezuela issue. There is plenty of commentary circulating about the geopolitical and energy market impacts, but I’d like to set those aside for now to focus on the broad market perspective, where scale is the key factor to focus on. Venezuela represents roughly 0.07% of global GDP and produces less than 1% of the global oil supply. While leadership changes and geopolitical developments there warrant monitoring, any meaningful shifts in production, investment, or trade would take years to materialize—not quarters.
For investors, that timeframe is important. Markets tend to react quickly to uncertainty surrounding regional conflict, but they also tend to move on just as quickly once the economic footprint becomes clear. Put another way, geopolitical events can influence short-term sentiment, but they rarely alter the core economic inputs that matter most for markets over the next year (growth, earnings, interest rate policy, and capital allocation).
[1] Q3 2025 GDP data was released on a delayed schedule, due to the government shutdown last year.
Which brings me to the final component of the GDP report that stood out: trade. Exports rose at an 8.8% annualized pace, adding roughly 0.9% to GDP, while imports declined—pushing net trade’s contribution to about 1.6%. In Q1 2025, imports surged 38% as businesses ‘front-ran’ tariffs, and inventories alone added about 2.6% to growth. Since then, the process has been unwinding, with imports cooling and inventories being drawn down. In a normal cycle, falling imports could hint at softer domestic demand, so I think investors should be watching this metric closely in 2026.
Bottom Line for Investors
Taken together, the Q3 2025 GDP report paints a picture of an economy that is growing, but not accelerating uniformly beneath the surface. Strip out government spending and trade distortions, and growth in core private demand looks broadly similar to Q2 2025. That consistency helps explain why markets didn’t exhibit much volatility, up or down, in the second half of last year.
Looking ahead to 2026, three questions stand out:
- Does business investment rebound as policy and trade uncertainty begin to clear, or does caution persist?
- Do trade flows normalize as inventory dynamics settle, or do imports continue to weaken as new frictions emerge?
- Can consumers continue to support growth if hiring remains subdued and wage gains slow further?
How those three dynamics unfold in the early 2026 data will be key in shaping the growth outlook for the year.
Disclosure
1 BEA. 2025. https://www.bea.gov/sites/default/files/2025-12/gdp3q25-ini.pdf
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