This Economic Expansion Appears Stronger than Expected

The widely held expectation of a 2% growth in the economy for the upcoming year seems increasingly disconnected from what’s actually happening.

Consumer spending maintained a steady rise in November. American consumers, benefiting from increasing incomes, moderate inflation, and stable job levels, are showing impressive confidence as they use their savings to keep up with strong spending habits.

According to the Bureau of Economic Analysis (BEA), inflation-adjusted consumer spending increased by 0.3% for the second consecutive month. This news came after delays in reports due to the federal government shutdown.

Despite ongoing complaints about high prices, the data reveals that American consumers are spending confidently. This trend is bolstered by wage growth and labor costs that continue to outstrip what’s needed for a stable labor market. Real consumption growth remains at 0.3%. Purchases of goods and services surged in both months, aiding economic expansion as we head into the fourth quarter.

Personal spending was primarily fueled by notable growth in goods—like vehicles, fuel, and clothing—as well as strong service spending, especially in health care and financial services. The increase in discretionary spending on leisure activities and dining out underscores this sentiment: Consumers are feeling comfortable with their spending choices.

The BEA’s report states that Gross Domestic Product (GDP) saw a revised annual growth rate of 4.4%, marking the highest figure for the third quarter in two years. Private consumption saw its fastest growth of the year. Meanwhile, the Atlanta Fed’s GDP Now tool estimates a fourth-quarter growth rate of 5.4%. However, many economists think this figure might be overly optimistic, influenced by data delays and quality issues from last year’s government shutdown.

Consumers Confidently Spend Their Savings

The personal savings rate dropped to 3.5% in November, the lowest since October 2022, as many Americans opted to keep spending rather than build up savings. The savings declined from $843.9 billion in October to $799.7 billion in November.

While some analysts see this decline as a potential sign of financial strain, it’s often a classic signal of consumer confidence. Families that feel secure in their jobs and income sources are usually more inclined to spend rather than save for a rainy day. This pattern hints that Americans are expecting the economic expansion to persist.

The combination of robust real spending growth alongside decreasing savings rates suggests prevailing confidence among consumers regarding their financial standing. Typically, worries about job stability or economic conditions lead people to cut back on expenditures and save more. Current data is showing quite the opposite.

Wages and salaries rose steadily by 0.4% in November, supporting household purchasing power. Although some experts have raised concerns about labor market weaknesses, a closer look at the fundamentals reveals a different story.

Labor Market Appears Stronger Than Headlines Suggest

Recent analyses from various institutions, including Dallas Fed and RBC Economics, have significantly lowered their estimates of “break-even employment,” referring to the job creation needed to keep the unemployment rate stable.

This adjustment reflects demographic trends like baby boomers retiring and fewer immigrants entering the workforce, leading to a collapse in break-even employment. Estimates have dropped from more than 100,000 jobs monthly to around 30,000 to 40,000.

Last year, job creation averaged about 49,000 monthly. While some might view this figure as sluggish compared to the rapid changes of 2022-2023, it actually reflects a healthy labor market. These new demographic realities indicate that claims for unemployment benefits remain historically low at approximately 200,000, and the unemployment rate sits at 4.4%, well below the postwar average.

A Dallas Fed study released in October proposed that the slow job growth that may have seemed worrying in 2023 is trending downward and points to a stable and balanced market considering the shifts in demographic factors.

This new perspective can shed light on consumer behaviors. Rather than spending “despite” a weak labor market, consumers are spending confidently because the labor market remains fundamentally healthy, just adjusted for current demographic realities.

Inflation Approaches the Fed’s 2% Target

Regarding inflation: The Personal Consumption Expenditure (PCE) price index, which the Fed uses, rose 0.2% in both October and November. The core PCE price index, which omits food and energy, matched this increase in both months.

Compared to the same months last year, the PCE price index increased by 2.7% in October and 2.8% in November, with the core PCE inflation reflecting similar figures. Annualized monthly PCE rates show fluctuations: 3.2% in September, 1.9% in October, and 2.5% in November. The annualized core PCE inflation for November was 2.3%, down from 2.5% in September and 1.9% in October. The three-month annualized headline PCE inflation decreased to 2.5% in November from 2.8% in September, with the core rate following suit, inching down to 2.3% from 2.7%.

Note that the recent government shutdown hindered the Bureau of Labor Statistics from collecting Consumer Price Index data for October 2025, leading to estimates based on September and November’s figures, which could affect data comparability.

Significantly, basic inflation measures indicate a notable decline in price pressures, drawing closer to the Fed’s target. The median PCE inflation rate remains steady at 0.1%, the same for three consecutive months. The median annual inflation rate over six months has stabilized at 2.5%. The Dallas Fed’s measure of underlying inflation, known as the trimmed average inflation rate, saw the lowest levels since 2020, with a monthly rate of 1.5% for October and November.

To sum up, we are nearing the Fed’s 2% goal. This could allow for further rate cuts beyond what is currently anticipated, even if the Fed Chair, Jerome Powell, maintains a cautious approach to manage economic growth during the midterm election year.

The interplay of solid wage growth, low inflation, confident consumer behavior, and a fundamentally sound labor market suggests that, despite demographic shifts resulting in fewer job additions each month, economic expansion is likely to maintain a healthy rhythm. This expansion will be supplemented by tax cuts from the One Big Beautiful Bill in early 2026 and stimulus from Federal Reserve interest rate cuts later in the year.

Thus, the current consensus forecast of 2.1% growth in 2026 seems almost certainly too conservative. Some predictors might be looking closer to 3% growth, which could turn out to be prophetic.