U.S. Department of the Treasury

Introduction

Economic data received through September 30, 2025, suggest that U.S. economic growth solidified in the third quarter of 2025 with steady business investment and consumer demand. Stock markets reached record highs during the quarter—and have set additional highs since—while earnings growth has been stable. Meanwhile, yields on U.S. Treasury notes and bills eased over the third quarter: the average yield on the 91-day bill was 11 basis points lower from the second quarter, while the 10-year note yield was 10 basis points lower. Yields have eased further over the last month, nearing 4.00 percent for both the 91-day and the 10-year issuances.

Labor markets stabilized in July and August, with modest employment growth consistent with that of the second quarter. Forced deportation and voluntary self-deportation of illegal immigrants has reduced labor supply, but labor demand has similarly decreased. This has kept aggregate labor markets roughly in balance. With modest hiring but low layoff rates, firms appear to be planning for output growth via productivity improvements.

Real Gross Domestic Product (GDP)

Private-sector forecasters estimate that, given data released for July and August, total economic growth remained solid in the third quarter. According to the most recent publicly available survey (the Wall Street Journal quarterly survey published on October 12, 2025), the median forecast for third-quarter GDP growth was 2.7 percent at an annual rate – an upswing from the July survey median of 1.0 percent annualized growth. This upward revision reflects monthly data that suggests strong private final domestic demand.

• In just the first two months of the quarter, real personal consumption expenditures (PCE) were up 2.8 percent at an annual rate, picking up modestly from the second quarter.
• In addition, business shipments of core (nondefense and excluding aircraft) picked up to a 3.3 percent annualized growth rate in July and August from the second quarter.
• Anecdotal and news reports suggest that research and development for artificial intelligence continues to propel business spending on intellectual property products.

The lapse in government funding has delayed surveys and reports that are used to estimate GDP for the third quarter of 2025. As such, official data on real GDP growth last quarter will not be available until after normal government operations resume.

Labor Markets

Labor market data was relatively steady in the first two quarters of the third quarter (see Table 1 – Labor Market Indicators). Monthly job growth moderated slightly, while the average unemployment rate ticked up only slightly and the average headline labor force participation rate (LFPR) ticked down. 

• Total payroll job growth averaged 51,000 per month during first two months of the third quarter of 2025, after averaging 55,000 per month during the second quarter. The slower growth from the second to third quarters, however, partly reflected the shedding of federal government jobs – with a monthly average decrease of 12,500 in federal employment. By contrast, private sector job creation remained steady at 58,000 jobs per month in July and August. Although this growth rate is below the roughly 100,000 jobs added per month in the first quarter of 2025 it likely reflects the drop in population growth related to the forced and self-deportation of illegal immigrants. A lower population growth leads to a lower breakeven rate of payroll job growth—that is, the pace of net hiring needed to maintain a steady unemployment rate.
• From May 2024 to July 2025, monthly unemployment rates fluctuated within a narrow range of 4.0 percent and 4.2 percent. In August, the unemployment rate ticked up to 4.3 percent of the labor force, and the average for July and August was 4.29 percent. Nonetheless, unemployment rates in the third quarter remained just below the Congressional Budget Office’s 4.4 percent estimate of the non-cyclical unemployment rate—or the rate of unemployment that is consistent with stable inflation and excludes fluctuations in aggregate demand.
• The labor force participation rate (LFPR) ticked down in the second quarter – though the more salient prime-age working force participation rate ticked up. On average in July and August, the overall LFPR eased to an average of 62.3 percent, primarily reflecting lower participation by the ages 16 to 24 worker cohort. The average participation rate by below-prime workers was down by 1.7 percentage points in July and August from the first quarter of 2025. In addition, persistent broader demographic trends from the retirement of Baby Boomers contributed to the slight, 0.1 percentage point decrease in the LFPR for those of age 55 years or older. By contrast, the prime-age LFPR – that is, participation by workers ages 25 to 54 years old – increased to an average 83.6 percent in the third quarter.
• In the available data for the third quarter, labor demand as measured by job openings eased, but it remained relatively stable after adjusting for the number of available unemployed workers. During July and August, there was an average of 7.2 million job openings per month, down from 7.5 million on average in the second quarter. However, the ratio of job openings (or vacancies) per unemployed worker remained steady at 1.0 vacancies per unemployed person.
• Meanwhile, layoffs and discharges remained low. Private-sector layoffs and discharges accounted for just 1.3 percent of employment in July and August, in line with the low rates that persisted during President’s first term before the pandemic. 

Inflation

Inflation remained above the target of 2 percent in the third quarter (see Table 2 – Inflation Indicators). As of September 2025, inflation—as measured by the headline consumer price index (CPI)—was 3.0 percent on a twelve-month basis. The elevated annual growth partly reflects the strong price pressures from September 2024 to January 2025, in which headline CPI rose by 4.1 percent at an annualized rate. From January 2025 to September 2025, CPI growth was more moderate at 2.5 percent at an annual rate.

• CPI inflation for energy goods and services picked in the third quarter to an average 0.4 percent per month, after rising an average 0.2 percent per month in the second quarter. The increase in energy prices largely reflected higher gasoline prices.
• Food prices for both groceries (food at home) and food services (food away from home) increased moderately in the third quarter. The CPI for food at home rose 0.3 percent per month on average, while the CPI for food away from home increased an average of 0.2 percent per month.

Monthly core CPI inflation averaged 0.3 percent in the third quarter. Over the twelve months through September 2025, the core inflation rate was 3.0 percent. So far this year, annual core inflation has ranged between 2.8 percent and 3.1 percent, save for the 3.3 percent rating realized in January from when President Trump assumed office.

• Core goods prices increased 0.2 percent on average per month in the third quarter, ticking up 0.1 percentage points from the rates in the previous three quarters. Core goods prices began rising in September 2024, which has elevated core goods inflation to 1.5 percent over the year ending September 2025.
• Inflation for rent of housing services (rent of primary residence and owners’ equivalent rent) averaged 0.3 percent per month in the third quarter, where it has held for the previous three quarters. Over the year through September 2025, rent of housing inflation was 3.7 percent, the slowest annual pace since December 2021.
• Inflation for non-housing core services picked up to 0.3 percent on average in the third quarter, with about half of the growth stemming from higher prices for airfares and lodging away from home. Over the year through September 2025, non-housing core services inflation was 3.8 percent, down from 5.2 percent over the year through September 2024.

Inflation as measured by the PCE price index has notable differences in weights and methodologies versus the CPI. Over the past 20 years, twelve-month CPI inflation has exceeded PCE inflation by about 0.36 percentage points on average. Over the year through August 2025, headline PCE inflation was 2.7 percent, or 0.2 percentage points below headline CPI inflation for that month. Similarly, core PCE inflation was 2.9 percent, below the 3.1 percent inflation rate as measured by the CPI.

Risks to the Outlook

Looking ahead to the next few quarters, the outlook for the U.S. economy faces upside and downside risks. However, on balance, economists view the risk of a recession as relatively low. According to The Wall Street Journal’s quarterly survey of economists, the median economist projected a 33 percent chance of a recession in the next twelve months, little changed from the 35 percent chance estimated by the median economist in the July survey.

Federal government shutdown: As of October 31, the federal government has been shut down for over four weeks, and the lapse in government funding is likely to continue for at least a fifth week. The shutdown reduces current quarter GDP growth through several channels: a direct channel of lost output from furloughed workers, a secondary consumption channel as excepted and furloughed federal workers await delayed paychecks, and ancillary impacts on complementary industries (such as government contractors and local services). Each week of this unnecessary shutdown adds drag to fourth quarter GDP and introduces downside risk to the near-term outlook.

Labor markets: Excluding the shutdown, declining government employment may create a headwind for labor markets in the fourth quarter of 2025. Roughly 150,000 federal employees opted into the Deferred Resignation Program to be put on administrative leave through September 30, 2025, after which they would voluntarily separate from the federal government. Thus, the employment report for October could show a decline in total payroll employment unless these employees had their resignation date postponed, were recalled from administrative leave upon agency reconsideration of staffing needs, or had found replacement jobs. The drag on job growth, however, could be mitigated to the extent that employees found other employment.

Aside from the government sector, Treasury is monitoring private-sector labor market developments closely. Although employment growth slowed in the second and third quarters of 2025, data do not indicate the slower growth is a result of soft GDP growth or weakening aggregate demand. Rather, labor supply and labor demand appear to have softened at the same time, leading to soft hiring without a sharp rise in unemployment. This is likely due to a lower breakeven rate of payroll job growth given the sharp drop in population growth that accompanied the Administration’s enforcement of immigration law.

Indeed, labor markets appear to remain in balance as labor demand has softened with easing supply. Since early 2022, the private sector hires rate has trended lower and was 3.5 percent as of August 2025, comparable to the slow recovery from the 2007 to 2009 recession. Even so, layoff rates also remain low with the private-sector layoff and discharges rate at just 1.2 percent in August 2025, below the 1.6 percent average from 2001 to 2019, just before the pandemic. With modest hiring but low layoff rates, firms appear to be shedding labor via attrition and planning on productivity to drive output growth. Further supporting for the continued balance in the labor market at a lower breakeven rate is the stable, low levels of initial and continuing jobless claims.

Energy prices and geopolitical uncertainty: Geopolitical uncertainty, such as the ongoing conflict in the Ukraine, continues to add upside risk to the medium-term inflation outlook. Energy prices are one of the most volatile categories of inflation, with geopolitical events leading to large swings in the energy prices. For example, the CPI for gasoline rose 3.7 percent (15.9 percent at an annual rate) from June to September, accounting for over 10 percent of quarterly CPI inflation. High energy prices eventually feed through to other consumer goods and services, such as food (through fertilizer and fuel for farming equipment) and airfares.

Artificial intelligence: Firms’ continued investment in artificial intelligence has significant potential to be a catalyst for productivity and economic growth—particularly for efficiency gains in service-sector industries where productivity growth historically has been slower than manufacturing industries. However, the timeline for when such boosts are realized, as well as the magnitude of said impetus, is still uncertain. If the integration of artificial intelligence boosts growth as a standard technology improvements, the productivity growth could return to historical norms after several years of above-trend growth. On the other hand, artificial intelligence could prove transformational and permanently upshift the path of productivity as it enables workers to build skills and human capital faster than in the past.

Artificial intelligence also could have disruptive impacts on the economy and labor markets as businesses and individuals integrate it or fail to. Firms that are slow to adapt to the technology could find themselves at a competitive disadvantage, as could workers that delay incorporating artificial intelligence to improve their skills growth and productivity.

Conclusion

Thus far in President Trump’s second term, the Administration has successfully stewarded major fiscal legislation to prevent a historic tax increase, and it continues to seek further cuts to federal spending and incentivize productive business investment. Ongoing trade negotiations are transforming trade relationships, which will put American citizens first and prevent other countries from taking advantage of the openness of our economy. Moreover, supply-side policies, deregulation, and other reforms will protect the American consumer from high inflation, supply-chain disruptions, and the destabilizing potential of geo-political strife while freeing up investment funds for more productive uses and encouraging a significant increase in domestic energy production. In just a short six months, the Administration has made extensive progress to enact an agenda that will bring prosperity to all Americans. 

Table 1 - Labor Market Indicators

Sources. Bureau of Labor Statistics, The Employment Situation - August 2025; Job Openings and Labor Turnover - August 2025.

Table 2 - Inflation Indicators

Sources. Bureau of Labor Statistics, Consumer Price Index - September 2025. Bureau of Economic Analysis, Personal Income and Outlays, August 2025.

¹ For CPI, 12-month growth is not seasonally adjusted.
² Imputed from the contributions to growth of the CPI for all items from the contributions from growth in the CPIs for rent of primary residence, owners' equivalent rent of residences, and services less energy services.
³ PCE and Core PCE calculations for Q3 are the average monthly growth rates for July and August 2025.