This Economic Expansion Looks Sturdier Than the Consensus
The consensus estimate that we’ll have a two-percent growth economy in the coming year is looking increasingly out-of-touch with reality.
Personal spending rose at a solid pace in November, with U.S. consumers seeing rising incomes, mild inflation, and steady employment—and demonstrating remarkable confidence by drawing down savings to maintain robust consumption levels.
Consumer spending, adjusted for inflation, increased 0.3 percent for a second month, the Bureau of Economic Analysis (BEA) said Thursday. The agency released both October and November figures after a lengthy delay caused by the federal government shutdown.
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The report shows American consumers spending with confidence despite persistent complaints of elevated prices, supported by wage growth and payroll expansion that continues to outpace what’s needed to maintain labor market stability. Real consumption growth of 0.3 percent in both months represents genuine increases in the volume of goods and services purchased, powering economic expansion in the fourth quarter.
Personal spending was led by the strongest advance in outlays for goods since July, including motor vehicles, gasoline and energy goods, and apparel. Services spending remained robust, led by health care, financial services, and other services. Spending on discretionary categories like recreation services, recreational goods, and dining grew robustly, reinforcing the message that consumers feel secure enough to spend on leisure.
Earlier on Thursday, the BEA reported gross domestic product increased at a revised 4.4 percent annualized rate in the third quarter, the most in two years. Personal consumption grew at the fastest pace of the year. The Atlanta Fed’s GDPNow, which estimates what current data implies for economic growth, has fourth-quarter growth at 5.4 percent. Most economists expect that number is likely too high, perhaps distorted by delays in data collection and poor data quality due to the government shutdown last year.
Confident Consumers Spend Down Savings
The data showed the personal saving rate fell to 3.5 percent in November, the lowest since October 2022, as Americans chose to maintain consumption rather than build precautionary savings. Personal saving declined from $843.9 billion in October to $799.7 billion in November.
While some analysts portrayed this as a sign of financial distress, this drawdown in savings is a classic indicator of consumer confidence. When households feel secure about their employment prospects and income streams, they’re comfortable spending rather than hoarding cash. The pattern suggests Americans expect the economic expansion to continue.
The combination of strong real spending growth and declining savings rates indicates consumers feel confident about their economic situation. When people get nervous about job security or the economy, they typically cut spending and build savings buffers. The current data shows the opposite pattern.
Wages and salaries increased a solid 0.4 percent in November, continuing to support household purchasing power. While some analysts have expressed concerns about labor market weakness, the underlying fundamentals tell a different story.
Labor Market Stronger Than Headlines Suggest
Recent research from major institutions, including the Dallas Federal Reserve, RBC Economics, and Visa, has dramatically revised downward estimates of “break-even employment” — the monthly job creation needed to keep unemployment stable.
Due to demographic factors including Baby Boomer retirements and reduced immigration, break-even employment has collapsed from previous estimates of 100,000-plus jobs per month to just 30,000-40,000 per month, according to these analyses.
Job creation averaged approximately 49,000 per month last year. While some have characterized this pace as weak compared to the torrid rates of 2022-2023, it actually represents a healthy labor market given the new demographic realities. Initial jobless claims remain at historically low levels around 200,000, and the unemployment rate of 4.4 percent is well below post-war averages.
Dallas Fed research published in October noted that modest payroll gains, which might have seemed alarming in 2023, are now indicative of a stable and balanced market given the dramatically lower break-even rate driven by demographic changes.
This reframing helps explain consumer behavior. Rather than spending despite a weak labor market, consumers are spending confidently because the labor market remains fundamentally sound, just recalibrated for new demographic realities.
Inflation Is Nearing the Fed’s 2% Target
From the preceding month, the personal consumption expenditure price index (PCE)—the Fed’s benchmark for inflation—increased 0.2 percent in both October and November. Excluding food and energy, the core PCE price index also increased 0.2 percent in both months.
From the same month one year ago, the PCE price index increased 2.7 percent in October, followed by 2.8 percent in November. Core PCE inflation matched these figures at 2.7 percent and 2.8 percent, respectively.
Base effects and rounding create a somewhat distorted picture of recent inflation trends. Annualizing the monthly PCE figures gives us 3.2 percent in September, 1.9 percent in October, and 2.5 percent in November. One-month annualized core PCE inflation ran at 2.3 percent in September, 2.5 percent in October, and 1.9 percent in November. On a three-month annualized basis, headline PCE inflation dropped from 2.8 percent in September to 2.5 percent in November. Three-month annualized core inflation fell from 2.7 percent in September to 2.3 percent in November.
(Note: Due to the recent government shutdown, the Bureau of Labor Statistics could not collect October 2025 consumer price index data. The BEA derived the October price indexes by using the geometric mean of September and November CPIs, which may affect data comparability.)
Underlying inflation measures also indicate that price pressures have come down a lot and are now approximating the Fed’s target. Median PCE inflation, as calculated by the Federal Reserve Bank of Cleveland, came in at 0.1 percent compared with the previous month, the third consecutive monthly reading at that rate. Six-month annualized median inflation is running at 2.5 percent. The Dallas Fed’s measure of underlying inflation, known as trimmed mean inflation, rose at a one-month annualized pace of 1.5 percent in October and November, the lowest since 2020. Six-month annualized trimmed mean inflation came in at 2.3 percent in both October and November.
In other words, we’re approaching the Fed’s two percent target. That should clear the way for more rate cuts than the Fed currently has priced in—even if Fed Chairman Jerome Powell clings to his governor seat and tries to throttle economic growth in a midterm election year.
The combination of solid wage growth, low inflation, confident consumer behavior, and a labor market that remains fundamentally healthy—despite requiring fewer monthly job additions due to demographic shifts—suggests the economic expansion can continue at a healthy pace. Add to that the stimulus coming in the first half of 2026 from the One Big Beautiful Bill’s tax cuts and interest rate cuts from the Fed in the second half.
What this implies is that the current consensus growth estimate of 2.1 percent for 2026 is almost certainly too low. Forecasters whose growth projections are closer to three percent or higher are likely to be proven prescient.
