Macroeconomic Update: Growth Surprised to the Upside

After the government shutdown in Q4 2025 delayed the release of several economic data points, we now know real Q3 2025 GDP growth was stronger than anticipated at +4.3% (as of the initial estimate). This robust growth follows a resurgent +3.8% in Q2 2025. Upside surprises to growth have been a hallmark of the economy following the tariff uncertainty-driven slump in Q1, and could continue as the Atlanta Fed GDPNow is projecting Q4 GDP growth of +2.7%. This number is in line with our previous expectation for the pace of GDP growth to slow from the summer, but is still indicative of sustained economic strength.

The most concerning aspect of the economy in the last several months has been the labor market. The slowed pace of hiring in the months leading up to the government shutdown and the subsequent uptick in the unemployment rate was enough to induce the Federal Reserve to embark on a cutting cycle. Data as of November shows U3 Unemployment standing at 4.6%, which is elevated relative to earlier in 2025, but remains below the long-term 5% threshold of “full employment”. We continue to monitor employment data for indications on the next move for the labor market and the ultimate ability for households to sustain economic activity.

Inflation continues to be stubbornly above the 2% target that has historically been considered sustainable. As of November, the Headline Consumer Price Index (CPI) was +2.7%, and Core CPI (which excludes volatile categories of goods like food and energy) was +2.6% (for the preceding 12 months). The Federal Reserve’s preferred measures of inflation, the Personal Consumption Expenditures Price Index (PCE) and Core PCE, were both +2.8% in November. In December, the Fed released its forecast for year-end 2026 inflation, which they expect to decline, but remain above target at +2.4% for PCE and +2.5% for Core PCE. This continued elevation will make the path for rate cuts more difficult to predict.

Against a tumultuous backdrop of tariff uncertainty, tax reform, and political/geopolitical headlines, markets remained resilient in 2025. Despite headline risk and much handwringing about the timing of interest rate cuts, we largely ended up with an environment of positive growth, navigable inflation, and benign interest rate policy. This combination allowed the US and international markets to deliver significant returns alongside solid fixed income and liquid alternative performance (See Markets).

Entering 2026, we anticipate continued positive economic growth and elevated but not accelerating inflation. Labor market weakness remains a significant concern, but we do not expect the impact of any sluggishness in the pace of job gains to impair GDP growth. Recession risk remains low, but a repeat of the very robust growth we saw in the 2nd half of 2025 seems unlikely. Our expectation is for moderate growth. On the back of three very strong years of market performance, we maintain the view that holding a diversified portfolio that aligns with your long-term risk tolerance is the best path toward meeting future financial goals. Entering 2026, we intend to keep portfolios in line with long-term model allocations, but we remain prepared to pivot if our assessment of the economic outlook changes.

This Commentary is provided by Spraker West Wealth Management, a registered investment advisor, and is for informational purposes only. It should not be construed as investment advice and is not intended as a solicitation of any specific product or service. Investments and/or investment strategies include risk including the possible loss of principal. There is no assurance that any investment strategy will achieve its objectives. Information provided is not intended as tax or legal advice and should not be relied upon as such. You are encouraged to seek tax or legal advice from a qualified professional.