The U.S. economy is running even hotter than previously thought, and GDP growth could reach 4% in Q3

On Thursday, second-quarter growth was revised even higher, to 3.8% from a prior reading of 3.3%, on robust consumer spending. That’s after a first-quarter dip that was driven by President Donald Trump’s trade war.

Meanwhile, third-quarter growth is shaping up to be hotter. Durable goods orders for August jumped more than expected, according to data released on Thursday. And the personal income and spending report on Friday showed consumption remained healthy in August while also topping forecasts.

Given that consumer spending represents over two-thirds of the U.S. economy, the gains more than offset weakness in housing, which remains buffeted by high home prices and mortgage rates.

The Atlanta Fed’s GDP tracker now puts third-quarter growth at 3.9%, up from an earlier estimate of 3.3%, citing the consumption data and a narrower trade deficit in August.

Growth may not stop at that lofty rate. Stephen Brown, deputy chief North America economist at Capital Economics, said in a note on Friday that the income and spending data should further ease fears that the U.S. is on the cusp of a sharp slowdown.

He also noted that discretionary spending, which typically is cut when consumers are suffering, drove growth. And while gains in spending have outpaced income for the last three months, the August savings rate was still at a relatively high 4.6%, meaning consumers are not yet overextended.

“The rise in real consumption in August means that, given the stronger momentum going into the third quarter, we now have third-quarter consumption growth tracking as high as 3.3%, up from 2.3% last week,” Brown added. “Third-quarter GDP growth will be as high as 4%.”

To be sure, stronger GDP also means the Federal Reserve will be under less pressure to lower rates aggressively. Capital Economics expects the Fed to cut at only one of its two remaining meetings this year, while Wall Street is betting on cuts at both meetings.

Recession fears

The upbeat growth forecast contrasts with warnings from Moody’s Analytics chief economist Mark Zandi, who has said the economy is “on the precipice of recession.”

While the third quarter, which ends on Tuesday, looks good, he predicted the U.S. will be most vulnerable to a recession late this year and early next as the impacts of Trump’s tariffs and immigration crackdown peak.

And despite consumption staying resilient in the face of elevated inflation and tariffs, housing could still lead the economy lower. Zandi has pointed to building permits as the most critical economic variable for predicting recessions, and they are now at pandemic-era lows.

The gains in aggregate consumption also obscure the sharp divide among American consumers, and the growing reliance on top earners.

Moody’s recently estimated that the bottom 80% of earners have merely spent in line with inflation since the pandemic, while the top 20% are driving growth.

“As long as they keep spending, the economy should avoid recession, but if they turn more cautious, for whatever reason, the economy has a big problem,” Zandi noted.

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