Despite Trump tariffs, US economy has grown at its fastest pace in two years. It may not sustain
Going forward, the sluggish labour market and stagnant real incomes could dent consumer spending in the US, especially as inflation surges
US President Donald Trump and Federal Reserve Chairman Jerome Powell in Washington earlier this year. AP Photo The US economy expanded by an annual rate of 4.3% in the three months to September, well above the expected 3.2%, marking the strongest growth in nearly two years.
The growth data, which had been delayed by the US government shutdown, was not expected to be this strong given that the American economy is coping with the impact of President Donald Trump’s trade and immigration policies, as well as rising inflation and cutbacks in certain segments of government spending. So what explains this surge?
The uptick
Three key factors really: a jump in consumer spending, a surge in net exports and higher government spending on defence.
The world’s largest economy was essentially boosted by strong consumer spending that grew at an annual rate of 3.5%, compared with 2.5% in the previous quarter, despite a slowing job market. Some of this has been attributed to households spending more on health and services that are part of the elderly care business.
There was a trade boost too. American imports continued to slide, given the raft of tariff barriers that are now in place, even as exports rebounded by 7.4% after a steady slide. As a result, net exports (total exports minus total imports, which serves as an indicator of a country’s trade balance) surged. Government spending also rebounded, helped by higher outlays on defence. In a post on social media, Trump claimed his tariffs were responsible for the strong growth figures.
Going into 2026, some of the tailwinds that could continue include the impact of the extended tax cuts and the US Federal Reserve’s moves to cut interest rates.
Headwinds loom
The gains on trade and higher defence spending largely offset the cutback in consumer spending, especially by lower-income households due to higher prices, and a slowdown in the housing market due to elevated interest rates despite the Fed’s rate cuts. Analysts also feel that going ahead, surging prices faced by households, especially the lower end ones, could make it difficult to sustain the unusually strong pace of growth.
Over the three months to September, the personal consumption expenditures price index surged to 2.8% compared with 2.1% in the previous quarter, according to US government data. Some of the recent surveys also suggest that households are reining in their spending.
Going forward, the sluggish labour market and stagnant real incomes could dent consumer spending, especially as inflation surges. Also the AI boom is masking some of the effects of the tariffs in the US, and the impact of the weakened American labour market will show up in spending trends.
And tariffs will slowly begin to bite as American inflation inches up further. The stock market boom, predicted largely on AI enthusiasm, is also likely to be dented if there’s a crash.
For India, a growing US economy generally offers an advantage through increased demand for exports (technology and services) and remittances. India’s trade data for November did show a sharp increase in shipments, direct and indirect, to the US, despite the high tariffs. Much of this is in sectors such as pharmaceuticals and electronics, where the tariffs largely do not apply yet. But sectors such as gems and jewellery too recorded a noticeable surge.
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