Even with "booming" GDP report, lots of weak spots and unanswered questions

One item that struck me in that allegedly strong GDP report of 4.3% growth is that there was a wide disparity in Q3’s inflation numbers, depending on how it was measured.

Price Indexes in Q3 2025
Gross Domestic Purchases index +3.4%
Core Gross Domestic Purchases +3.5%

GDP Price Index +3.8%
Core GDP Price Index +3.8%

PCE Price Index +2.8%
Core PCE Price Index +2.9%

So why are these measures of inflation so different? The Bureau of Economic Analysis explains the differences accordingly.

Gross domestic purchases prices. BEA's featured measure of inflation in the U.S. economy is the percent change in the price index for gross domestic purchases. This index measures the prices of goods and services purchased by U.S. residents (including the imports that they buy), regardless of where the goods and services are produced. The gross domestic purchases price index is derived from the prices of personal consumption expenditures, gross private domestic investment, and government consumption expenditures and gross investment. Thus, for example, a decrease in the price of imported oil would reduce the prices paid by U.S. residents and thereby directly lower the price index for gross domestic purchases.

GDP prices. Another aggregate price measure is the price index for GDP, which measures the prices of goods and services produced in the United States. In contrast to the price index for gross domestic purchases, this index would not be directly affected by an increase in the price of imports. Imports are excluded from GDP because they do not represent U.S. production.

Personal consumption expenditures (PCE) prices. Prices for consumer spending on goods and services is a component of both the gross domestic purchases and the GDP price index. This index measures prices paid by U.S. consumers, and is often compared with the Bureau of Labor Statistics’ Consumer Price Index.

So what that means is that American-made goods and services are having bigger price increases than the products and services (both imported and domestic) bought and paid for by Americans. And that prices are rising more for American businesses than it is for American consumers.

The GDP price index going up by 3.8% (annual rate) is the largest one quarter increase since the start of 2023, and translates into an increase in nominal GDP of 8.2% for Q3, which is a massive (some might say absurd) number. It’s also odd that the Investment sector of GDP (aka - housing and business spending) had a Q3 price increase of 5.0%, but the overall Consumer sector had prices rise by 2.8%, with goods only going up by 1.6%

That should result in some squeezing of profits for businesses, since their costs are going up more than they are for consumers. But that wasn’t the case in Q3, as corporate profits exceeded $4 trillion (annual rate) for the first time ever.

In addition, cheaper imports aren’t supposed to be the outcome you get when tariffs are put in place, nor should exports go up. Outside of functioning as another (regressive) revenue source for government, the idea of tariffs is to raise the prices of imports to the point that consumers prefer more domestically made products (which were more expensive than what the imports used to be). But perhaps we are seeing an effect of oil prices falling to multi-year lows on oversupply and lower US gas usage. In addition, the front-running of imports at the end of 2024 and start of 2025 may have already raised the prices of those products, and then maybe prices paid for the base product were adjusted down as the tariffs came into place?

The GDP report indicates that something like that may be happening, as the prices of imported goods went up by 1.6% in Q1 2025, but then dropped by 3.1% in Q2 and only increased by 0.9% in Q3. And maybe the 9.5% loss in the dollar index showed up in the surprising jump in exports for Q3, since it makes US products and services be cheaper in foreign countries, and brings in an inflated amount of depreciated dollars.

But combine this data with the alleged boom of Q3 at 4.3% (c'mon, humor me), and it would indicate that inflation should be going higher, and that the last thing the Federal Reserve should be doing is cutting interest rates and putting even more upward pressure on prices with overheated demand. But yet that is what the Fed did earlier this month, as fears about rising unemployment outweighed the rise in prices above their alleged target of 2% inflation.

Another aspect of last week’s GDP report showed that income growth from work was significantly weaker this Spring than we knew, as income and spending figures were revised to incorporate the recent release of the Quarterly Census of Employment and Wages (QCEW) through June, and take a look at what happened.

And real disposable income per capita has continued to flatten out in this country, falling below the trend that it was on for most of 2023 and the first part of 2024.

And yet Americans allegedly kept spending in Q3 despite the lack of income growth, which exhibits itself in a drop in the US personal savings rate.

That would lend itself to the argument that inflation is higher than the 2.7% number in the CPI, if you notice the drop in savings in late 2021 and 2022 happened as inflation spiked up.

And if inflation isn't at 2021-2022 levels, then let's look at another time period in my adult lifetime that had stagnating wages, dwindling savings, unaffordable housing, and a Bubbly stock market that kept going up despite weak fundamentals.

We know what happened after Sept 2007.

I wonder if this is an unspoken thing that Fed policymakers are aware of – that this is an economy that is being kept afloat by hot-potato paper trading and the building of data centers, with both items being done out of speculation of the need for added capacity for products that there may not be much organic demand for. Keeping rates lower keeps the music going for longer than it otherwise would, but central bankers admitting this would lead to panic in the financial markets.

So things continue on in the hopes that somehow we muddle through it without too many people being affected until there is something else that adds purchasing power and stability for everyday Americans. Do I think that “something else” is going to happen? No, especially as long as businesses are taking profits over paying workers. I just wonder when consumers and/or lenders get to a point where they say “I’M OUT” on all of this, and the current economic game ends.