Highlights
“Capital markets posted sharp gains in the 3rd quarter, shaking off economic uncertainty, a rising inflation outlook, and higher import tariffs.“
Summary
Overall, the U.S. economy sent mixed signals in the 3rd quarter of 2025, with strong GDP growth driven by robust consumer spending. However, the inflation outlook remained elevated, payroll growth remained sluggish and concentrated in a small number of sectors, and the housing market showed signs of weakening. GDP growth was primarily driven by strong consumer spending and higher net exports. While the GDP growth was positive and inflation outlook remained above the Federal Reserve Board’s target rate, the jobs market remained soft, leading the Federal Reserve Board to cut interest rates and signal a more aggressive stance on future interest rate cuts.
Domestic production growth was positive in the quarter. An increase in consumer spending and net exports contributed to GDP growth, partially offset by a decline in federal government nondefense spending and lower investment in inventories.
Inflation was in line with expectations despite higher prices in most categories compared to the previous quarter. Trade wars and concerns about softening U.S. and global economies led to lower crude oil prices. In response, the Federal Reserve cut the target interest rate and signaled that additional rate cuts are likely in the coming months.
A frequent bright spot for the economy in recent years, the job market sent mixed signals in the 3rd quarter of 2025, with the unemployment rate increasing, slightly higher labor force participation, and sluggish nonfarm employment growth. Still, the labor market remains well within the bounds of full employment.
Capital markets posted sharp gains in the 3rd quarter, shaking off economic uncertainty, a rising inflation outlook, and higher import tariffs. The tech-heavy NASDAQ indexes overperformed the broader S&P 500 and Dow Jones Industrial indexes.
Housing market data showed signs of losing momentum, with slower price growth in several metro areas. As sales remained constrained by elevated interest rates, unsold housing inventory increased compared to the previous year. Still, prices in all four U.S. regions continued to rise year-over-year.
FOMC members’ short-term domestic production and inflation projections outlooks were revised slightly upward. The unemployment forecast was revised slightly downward, while forecasts of longer-term economic performance were minimally changed.