By Lucia Mutikani
WASHINGTON, Dec 23 (Reuters) - The U.S. economy likely grew at a brisk clip in the third quarter, driven by solid consumer spending and business investment, but momentum appears to have since faded amid the rising cost of living and recent government shutdown.
The Commerce Department's initial estimate of third-quarter gross domestic product on Tuesday is also expected to show the economy was supported by lower imports, which helped to curb the trade deficit. Much of the anticipated
acceleration in consumer spending was the result of a rush to buy electric vehicles before the September 30 expiration of tax credits.
The data was delayed by the 43-day government shutdown and is now outdated. It will likely confirm what economists call a K-shaped economy in which higher-income households are doing well, while middle- and lower-income are barely staying afloat. Surveys suggest consumer spending, the economy's engine, is being driven by higher-income households, thanks to a stock market boom that has inflated household wealth.
Big businesses have mostly managed to withstand the blow from President Donald Trump's sweeping tariffs, which have increased costs, and are investing in artificial intelligence, reinforcing the economy's foundation, economists said. In contrast, smaller businesses have been hit hard, they added.
"It was a good quarter, but that is not going to be sustained in the fourth quarter," said Brian Bethune, an economics professor at Boston College. "Household budgets are squeezed, the average household, they are just barely keeping their nose above water in terms of real wage gains."
GDP likely increased at a 3.3% annualized rate last quarter, a Reuters survey of economists estimated. The economy grew at a 3.8% pace in the second quarter.
The Commerce Department's Bureau of Economic Analysis will also publish its preliminary estimate of corporate profits for the third quarter as well as gross domestic income, which measures economic growth from the income side.
The nonpartisan Congressional Budget Office has estimated the recent shutdown could slice between 1.0 percentage point and 2.0 percentage points off GDP in the fourth quarter. The CBO estimated most of the decline in GDP would be eventually recovered, but projected between $7 billion and $14 billion would not be.
Growth in consumer spending, which accounts for more than two-thirds of U.S. economic activity, is expected to have accelerated from the second quarter's 2.5% pace. In addition to households pulling forward EV purchases, spending was likely fueled by services, including air travel and hotel stays.
A Bank of America Institute report showed lower-income households were living paycheck to paycheck and have this year been allocating more of their budgets to groceries rather than eating at restaurants. They also have pulled back spending on clothing as well as airlines and hotels, reflecting their limited ability to substitute purchases amid elevated inflation.
In contrast, higher-income households are spending more at restaurants as well as on travel, entertainment and hotel stays.
HOUSEHOLDS FACING AFFORDABILITY CHALLENGES
Trump's trade policies have raised the prices of some imported goods, contributing to what economists have termed an affordability crisis that is tanking his approval ratings.
Households also are facing higher utility bills as the rapid growth of AI and cloud computing data centers boosts electricity demand. Some Americans will face skyrocketing health insurance premiums in 2026.
Inflation is expected to have accelerated last quarter, with the Personal Consumption Expenditures Price Index forecast to have increased at a 2.8% rate. The PCE price index rose at a 2.1% rate in the second quarter. It is one of the price measures tracked by the Federal Reserve for its 2% inflation target.
The U.S. central bank this month cut its benchmark overnight interest rate by another 25 basis points to the 3.50%-3.75% range, but signaled borrowing costs were unlikely to fall further in the near term as policymakers await clarity on the direction of the labor market and inflation.
Business investment likely contributed to GDP growth, reflecting ongoing strength in AI-related spending on intellectual property and equipment. Spending on structures like factories probably contracted for the seventh straight quarter.
"Despite the ongoing boom in data center construction, a decline in drilling rigs amid falling oil prices likely dragged down business structures investment," said Bernard Yaros, lead U.S. economist at Oxford Economics.
Growth also probably received a lift from a smaller trade deficit. Tariffs have caused wild swings in imports, resulting in the trade deficit subtracting from and adding to GDP by margins not seen since the government started keeping records.
Economists were divided on the impact of inventories and government spending on GDP last quarter. Some expected a small contribution, while others believed restocking was neutral. While some economists anticipated a rebound in government spending after declines for two consecutive quarters because of deep cuts at the federal level, others anticipated another quarter marked by a marginal decrease.
Residential spending, which includes homebuilding and sales, is expected to have contracted for a third straight quarter. The housing market has been slammed by higher mortgage rates, which have weighed on demand, as well as rising construction costs because of duties on imported materials.
"The AI boom is masking the ill effects of the trade war," said Sal Guatieri, a senior economist at BMO Capital Markets. "Growth will slow further in the fourth quarter due to the government shutdown before rebounding in the new year."
(Reporting by Lucia Mutikani; Editing by Paul Simao)
