The U.S. economy grew at an annual rate of 4.3% in the third quarter, beating economists’ expectations and producing the kind of headlines that signal strength heading into the new year. Consumers experienced unusually high spending while businesses realized $166 billion in capital gains. President Donald Trump and his team wasted no time celebrating, taking a victory lap over those dour economists who had warned against pessimism, declaring that “Trump’s economic golden age is full steam ahead.”
Well, slow down, these dour economists replied. Something is missing in this boom: jobs. Hiring this year, at best, has stalled, and at worst, it has collapsed: Unemployment has soared to 4.6%, and even Fed Chairman Jerome Powell has warned that recent data may overestimate job gains.
This is the puzzle that economists are now trying to solve. In a typical recovery, strong GDP growth shows up first in hiring, then in wages, and finally in consumer spending. But this quarter, it’s the opposite: spending is here without jobs. So how can an economy grow at an annual rate of 4.3% when households aren’t actually earning more and, in fact, continue to struggle with stubborn inflation?
“I’ve never seen anything like this,” said Diane Swonk, KPMG’s chief economist. Fortune. “Such stagflation in inflation and unemployment rates, and such stagnation in growth, is highly unusual and something has to give.”
A tale of two economies
There are two parts to the story of how the economy got here. The first is that households spend without increasing their income. Real disposable income remained essentially flat in the third quarter, growing literally 0%. Americans have not gained purchasing power. Yet they made up the difference by dipping into their savings, borrowing or absorbing costs they could not avoid. The GDP report itself indicates where this pressure is concentrated: primarily in services, and within services, healthcare has been the main driver.
Americans spent the most on health care last quarter since the Omicron wave of 2022, Swonk said. Spending on outpatient care, hospital services and nursing facilities has increased at one of the fastest rates in years, reflecting an aging population and rising drug prices, but also the growing use of expensive GLP-1 weight-loss drugs, which continue to drive up spending even after adjusting for inflation.
So it was not a classic discretionary splurge. These were expenses that families had little opportunity to postpone. This distinction is important because spending motivated by necessity behaves very differently from spending motivated by increasing wages. When households pay more for health care, insurance, child care, or elder care, they do not demonstrate trust; rather, they absorb pressure. And with stable real disposable income, these costs are not covered by wage growth, but by lower savings and deferred choices elsewhere, Swonk said.
The problem, then, is that when this pressure eases in early 2026, as tax refunds increase and withholding changes temporarily put more money back into paychecks, this increase could act as a “sugar peak”: a short-term spending increase that will not solve the underlying problem of weak job creation and stagnant real incomes.
“We will feel more widespread gains as we approach 2026,” Swonk said, “but at what cost?
The concern, she added, is that stimulus measures on top of already high inflation in the services sector could make price pressures “more stubborn”, rather than relieving them.
The second part of the story, and the most Fortune readers will already recognize this – that this economy no longer evolves as a single system. It divides into a “K shape” and what looks like resilience at the top increasingly masks the fragility below.
The GDP report makes this divergence hard to ignore. Along with rising consumer spending, corporate profits from current production jumped $166 billion in the third quarter, a dramatic acceleration from the previous period. At the same time, investment fell, driven by a sharp reduction in private inventories as businesses shed their accumulated pandemic-era reserves. Companies are not expanding capacity broadly, hiring aggressively, or hiring at all. They extract margins, manage costs and, in many cases, wait. They learned to grow without hiring, Swonk said.
“Our view is that most of the productivity gains we’re seeing now are really just the result of companies being reluctant to hire and doing more with less,” she said. “Not necessarily AI yet.” In other words, businesses reduce output from a fixed or shrinking workforce, without increasing payroll to meet new demand.
The K-shaped economy has reached maturity
On one side are affluent households and asset owners, whose spending continues to be supported by strong stock markets, jubilant after a historic year of AI spending, high real estate values and corporate profit growth. On the other side are workers and low- and middle-income households, whose spending, as already mentioned, is increasingly conditioned by constraint rather than confidence, which explains the constant “affordability crisis”. The overall GDP figure combines the two groups into one figure, but not the lived economy.
Swonk noted that recreational services – travel, leisure, high-end experiences – remain a bright spot, but are predominantly provided by higher-income households. Even there, the data reveals tensions beneath the surface. Holiday activity in August, she said, was the second lowest on record for that month, trailing only August 2020. Airlines and hotels continue to fill premium seats, but this demand is increasingly concentrated at the top.
The danger, according to Swonk, is that these two engines behave very differently over time. Spending supported by asset appreciation can persist as long as markets cooperate. However, necessity-driven spending cannot.
“When you support an economy through wealth effects and affluent households, rather than employment gains and new wage generation, you are vulnerable in the event of a stock market correction,” Swonk said. She described how quickly this channel can reverse: foot traffic slows, discretionary spending recedes, and high-end demand evaporates far more quickly than overall GDP data suggests.
“When you separate growth from employment gains, you have a problem,” Swonk said. “And this is even before the real effects of AI become evident. »
