Economy Statement for the Treasury Borrowing Advisory Committee

Introduction

The economy under the Trump Administration is strong, supported by robust business investment in equipment and intellectual property products, as well as solid household consumption growth. Business fixed investment (BFI) rose by over 10% at an annual rate over the first three quarters of 2026, driven by investments in new equipment and intellectual property. Since December 2025, the private sector has added 634,000 net new jobs across a broadening range of industries. The unemployment rate and initial unemployment claims remain low, and real weekly wages have grown since the President's inauguration.

Real Gross Domestic Product (GDP)

The economy in the third quarter of 2026 (3Q26) grew at the fastest pace in the last four quarters. According to the advance estimate, real GDP grew by 3.4% at an annual rate, accelerating sharply from the 2.2% advance in 2Q26. Core demand in the private sector remained unusually strong, with private domestic final purchases (PDFP) - the combination of PCE, BFI, and residential investment - rising 4.9% at an annual rate, the strongest pace in over five years and following a 4.6% gain in 2Q. Apart from outsized growth of PDFP in the recovery from the short pandemic recession, these were the first back-to-back gains above 4.5% since 2014. The robust PDFP growth in 2Q and 3Q26 suggests a marked boost in the economy's already-solid capacity for self-sustaining growth in future quarters.

• BFI grew by 12.7% at an annual rate in 3Q26 - after the very rapid paces of 9.0% in 2Q and 9.9% in 1Q26 - and alone contributed 1.8 percentage points to GDP growth. The third quarter's rate was the fastest in 15 years, outside of wide swings seen during the pandemic.
  • Equipment investment surged by 20.9% at an annual rate, the third consecutive quarter of double-digit growth, bringing the annualized rate thus far in 2026 to 16.6%. While super intelligence-related (SI-related) investments contributed to record levels of equipment capital expenditure through the first three quarters, capital expenditure growth was broad-based in 3Q26. Industrial equipment investment rose at an annual rate of 24.7%, following 27.0% annualized growth in 2Q26.
  • Investment in intellectual property products expanded by 8.4% at an annual rate, reflecting businesses' continued high levels of investment in software, as well as research and development.
  • Structures investment turned strongly positive in 3Q26, rising 5.4% at an annual rate, after inching up 0.1% in the previous quarter. Structures investment in 3Q26 was the strongest since 4Q23, and this quarter marked the first back-to-back quarterly gains in structures investment in three years. Spending on data centers accelerated to a triple-digit pace in 3Q26.
• Persistently strong personal consumption expenditures (PCE), which account for roughly two-thirds of the U.S. economy, remained the largest contributor to GDP growth. PCE grew by 3.8% at an annual rate in 3Q26, matching the 2Q pace and adding 2.5 percentage points to real GDP growth. Consumer spending on services accelerated in 3Q26 (led by both health care services and food services and accommodations), while goods spending remained solid (led by prescription drugs).
• Residential investment declined by 3.3% at an annual rate, reversing a 2.8% increase in 2Q. The decrease in residential investment shaved 0.1 percentage points from growth. Spending on single-family structures and brokers' commissions (the latter related to existing home sales) both declined, more than offsetting a slight increase in multifamily structures investment.

Of the remaining components of GDP, the trade deficit widened, posing a larger drag on growth. Exports of goods and services declined, led by petroleum and related products-though exports of intellectual property services increased at a double-digit rate. Meanwhile, imports surged, largely due to non-automotive capital goods. These imports are enabling U.S. businesses to meet the increased demand arising from a boom in capital expenditures. On balance, net exports subtracted 3.3 percentage points from GDP growth.

By contrast, the change in private inventories and total government spending both added to economic growth. The federal contribution to growth surged, reflecting more national defense expenditures as well as less drawdown in the Strategic Petroleum Reserve. Meanwhile, state and local government expenditures were essentially flat. Public spending and the change in private inventories added a combined 2.5 percentage points to real GDP growth in 3Q26.

Labor Markets

Job growth remained consistent with breakeven employment in 3Q26, and other measures of labor markets remained healthy (see Table 2 - Labor Market Indicators). Private-sector employment growth and the unemployment rate indicate a full-employment economy-one that has steady job growth with neither rising unemployment nor inflationary pressures from wages. The prime-age (ages 25 to 54) labor force participation rate (LFPR) remained at a high level despite a slight decline in the overall LFPR. Job openings were relatively stable in both absolute terms and relative to the number of unemployed persons. Preliminary 4Q26 readings indicate that unemployment claims through mid-October stand near multi-decade lows.

• Net new payrolls averaged 51,000 per month in 3Q26. Year to date, establishments have added an average of 68,000 jobs per month in 2026.
  • The private sector continues to lead job growth, and payroll job creation has begun to broaden across various sectors. In 3Q26, average job growth in the private sector was 54,000 per month, slowing from 79,000 per month in 2Q26. For the first time since early 2023, health and education services accounted for less than half of private-sector job growth and manufacturers, wholesale traders, and transportation and warehousing firms saw solid net employment growth.
  • Government payrolls declined slightly in 3Q26, shedding an average of 4,000 jobs per month that was largely due to local governments. Total federal payrolls continued to hold at about 2.68 million workers, down from 3.01 million in January 2025.
• The unemployment rate declined further in 3Q26 to an average of 4.1%-down from averages of 4.3% in the first half of the year. This is well in line with mainstream estimates of the noncyclical unemployment rate-that is, consistent with stable inflation and steady economic growth.
• Wage growth remained solid in the third quarter: over the year through September 2026, nominal average hourly earnings (AHE) for all employees were up 3.0%, and average weekly earnings were up 3.6% over this period. The difference between AHE and AWE growth reflects a small increase in average weekly work hours.
  • The Employment Cost Index (ECI) for all private workers, which controls for compositional changes and includes employee benefits, rose 3.4% over the year ending in September 2026. This was a tick faster than Q2's pace, reflecting stable wage growth and slightly faster increase in employee benefits.
• Labor force participation declined slightly in 3Q26, partly reflecting ongoing demographic pressures. The overall LFPR slipped to an average of 61.6% in 3Q26 from 61.7% in 2Q26.
  • Although the LFPR among prime-age workers ticked down in 3Q26 to 83.5%, it remained 0.4 percentage points above the previous business cycle peak in January 2020. Participation remains particularly resilient among prime-age men: the LFPR for this group averaged 89.3% in 3Q26, just 0.1 percentage point shy of the previous business cycle peak.
• Monthly job openings averaged 7.2 million in July and August (latest data available), down 0.2 million from 2Q but up from 6.9 million per month in 4Q25 and 1Q26. The ratio of job openings to unemployed persons averaged 1.0 per month in July and August.
• Other indicators reflect labor markets' ongoing health and stability.
  • The layoff rate remains stable and near historical lows and the hires rate has remained stable since mid-2024.
  • Initial unemployment claims trended down in 3Q26 and remained exceptionally low by historical standards through mid-October.
  • Business applications reached a record high of more than 576,000 in July and remained high through Q3, indicating potential increases in new firm births and associated opportunities for American entrepreneurs.

Inflation

Headline CPI rose 3.7% over the 12 months through September 2026, picking up from the 3.0% annual CPI inflation rate through September 2025. Energy inflation drove roughly 40% of the increase.

• Average headline inflation ticked up to 0.4% per month in 3Q26 from 0.2% in 2Q26 (see Table 3 - Inflation Indicators).
• Energy price inflation accelerated in 3Q26. CPI inflation for energy goods and services averaged 1.9% per month in 3Q26, up from the monthly average of 0.6% in 2Q26 but well below the 3.2% monthly average in 1Q26.
• Food price inflation averaged 0.1% per month in 3Q, down from 0.3% in 2Q, as pressures in the food-at-home category - including beef and coffee prices - receded. Over the 12 months through September, food price inflation was 2.5%, 0.6 percentage points below its year-earlier rate.

Twelve-month core CPI inflation, which excludes the volatile components of food and energy, stood at 2.6% as of September, slowing from the 3.0% rate through September 2025. On a monthly average basis, core inflation ticked up to 0.3% in 3Q26 after averaging 0.2% per month in the first and second quarters.

• Monthly core goods prices increased 0.2% on average in 3Q26, after declining by 0.1% per month in 2Q26. About half of the swing was attributable to new and used motor vehicles, which had flipped from a deflationary to an inflationary force beginning in 2Q. Nonetheless, on a twelve-month basis, core goods inflation was 0.7% through September 2026, the slowest rate since June 2025.
• Rent of housing inflation decelerated to 0.3% per month in 3Q26, down from 0.4% in 2Q26. Rent of housing inflation was 3.2% over the year through September, well below the 3.7% year-earlier rate and slightly below the pre-pandemic average of 3.3%. Inflation for rent of housing services (rent of primary residence and owners' equivalent rent) has eased since 2024.
• After slowing by half in 2Q26, inflation for non-housing core services averaged 0.4% per month in 3Q26. Most of the acceleration of non-housing core services was due to a pickup in transportation services. Over the year through September 2026, non-housing core services inflation was 3.1%, slowing slightly from the 3.2% year-earlier rate.

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 0.35 percentage points on average. Over the year through September 2026, headline PCE inflation was 3.6%, above the 2.8% pace over the year through September 2025. The Federal Reserve's target for headline PCE inflation is 2%.

Risks to the Outlook

Looking ahead to the next few quarters, the outlook for the U.S. economy is favorable and economists view the risk of a recession as low. According to The Wall Street Journal's survey of economists in October, the average probability of a recession in the next 12 months was just 24%, little changed from 25% in the July survey. The survey also indicated an improved near-term outlook. Projected real GDP growth in 2026 was revised up by 0.3 percentage points to 2.4%, and the expected unemployment rate in December 2026 was revised down to 4.2%. Compared with the July survey, respondents projected slightly higher headline inflation, lower core inflation, and higher interest rates.

Energy prices and geopolitical uncertainty: Geopolitical uncertainty remains a risk to the medium-term inflation outlook. Energy prices are among the most volatile categories of inflation and reflect this uncertainty. Indeed, the energy goods and services CPI fell 1.5% in July but rebounded 2.1% in August and 5.2% in September. The timing, duration, and magnitude of energy price swings contribute to the risk of increased inflation in other goods and services - such as food (through fertilizer and fuel for farming equipment) and airfares - adding uncertainty to the medium-term inflation outlook.

Importantly, the Trump Administration's policies have made the U.S. economy more resilient to fluctuations in global oil prices. This resilience is due to a wide range of policies enacted, including deregulatory actions that have increased production and exports of oil and gas, and strategic actions abroad that have resulted in increased demand for U.S. crude and increased supply to the U.S. outside of the Middle East. Average domestic crude oil production in 2025 rose by 350,000 barrels per day relative to the 2024 average, and production and exports have risen further in 2026 as U.S. producers continue to build out U.S. infrastructure. The United States is increasingly the world's largest producer of petroleum products and natural gas, and it is a net exporter of both.

Business fixed investment and the manufacturing outlook: Recent data suggest that the economy is in the early stages of a policy-driven capital-expenditure boom. Since the passage of the Administration's signature tax bill (the Working Families Tax Cuts), real BFI has risen by a cumulative 9.4% through 3Q26. Provisions in the tax law - such as full expensing of research and development, 100% bonus depreciation for business equipment investments, and restoring deductibility of interest expenses for capital-intensive manufacturers - have contributed to this rapid business investment growth. Indeed, business equipment investment alone has added 0.8 percentage points to GDP growth over the past four quarters, while spending on intellectual property products has contributed 0.5 percentage points.

The tax law also included a temporary provision for full depreciation deduction for the costs of new, nonresidential manufacturing facilities. Although real investment in factories and manufacturing structures has declined since mid-2024, the manufacturing outlook appears favorable. Jobs related to the construction of nonresidential buildings have grown by 116,000 since September 2025, presaging future manufacturing sector growth as new facilities are completed and products are deployed. In addition, firms that manufacture durable goods have increased their payrolls by 101,000 so far this year. Job openings in durable goods manufacturing grew by 93,000, and layoffs and discharges fell by 7,000.

This capital expenditures boom bodes well for future economic growth. Capital expenditures correlate with productivity growth, which is a strategic pillar of the Administration's economic agenda: productivity growth helps drive stronger economic growth and, as a positive supply-side development, is usually disinflationary while increasing wage growth.

Interest rates: At the end of 2025, the yield on the 10-year Treasury note was 4.18%. As of October 30, it was 76 basis points higher. Several factors may have contributed to this increase, including optimism around U.S. growth expectations alongside higher demand for capital from investments related to SI.

Since last year, economists' forecasts have improved: the Blue Chip consensus for real GDP growth five years ahead has increased from 1.9% in the October 2025 report to 2.1% in the October 2026 report. Improved growth prospects can lead to higher interest rates as the returns from business investment rise. Increased demand for credit to finance capital investment also correlates with higher interest rates.

The risk to the economic outlook is that higher borrowing costs could worsen the federal debt trajectory. However, U.S. fiscal sustainability does not appear to be a significant driver of the year-to-date increase in interest rates. Rate increases have been a global phenomenon even among countries with lower debt-to-GDP ratios.

Super intelligence (SI): Investment in super intelligence has been a significant driver of economic growth in recent quarters. In the first three quarters of 2026, SI-driven investment (BFI in software, computers and hardware, and data center structures relative to pre-large language models trend) accounted for nearly 30% of GDP growth.

In the long run, firms' continued investment in super intelligence is likely to lead to efficiency gains, particularly in service-sector industries where productivity growth has been slower. However, the timeline and magnitude of productivity gains are uncertain, as is the ultimate effect on the composition of labor markets. If the integration of super intelligence acts as a standard technology improvement, productivity growth could return to historical norms after a period of above-trend growth. On the other hand, super 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.

Labor markets: While labor markets are in balance, labor data indicate an environment of lower job churn than in the past, which could leave the economy with less slack to absorb a negative shock. So far this year, the median private-sector hires rate has been 3.6%, compared to a median of 4.2% in 2019.

By contrast, rates of layoffs and discharges for the private sector have remained near historical lows, with the layoffs rate at just 1.2% in August. The lower turnover environment, while indicating that labor markets are in balance, also suggests a large shock could shift markets out of balance as hiring may not be able to offset an increase in the layoffs and discharges rates.

Conclusion

The U.S. economy remains resilient, and the outlook is favorable. Historically high capital expenditures and steady household consumption growth have increased the economy's capacity for self-sustaining growth. In the labor market, the unemployment rate and layoffs are low, wages are increasing, and new business applications hit an all-time high. Although energy markets have affected headline inflation, the U.S. economy is resilient to fluctuations in the supply of oil from the Strait of Hormuz, and energy prices should recede following the cessation of conflict in Iran.

The Trump Administration has successfully stewarded major fiscal legislation to prevent a historic tax increase and lower the cost of capital, which has increased return expectations in the market. Since its passage in July 2025, we have seen significant business equipment investment, including industrial equipment. Indeed, current macroeconomic conditions bode well for increasing economic growth as the private sector leads. A net 22% of small businesses report plans to make capital outlays over the next six months, and the Business Roundtable reports that its index of CEO expectations of capital expenditures is now at its highest level since early 2022.

Announced investments in U.S. manufacturing, production, and innovation total trillions of dollars, reflecting global confidence in the United States as a destination for investment. This capital expenditure boom is made possible by the Administration's policies allowing full expensing of equipment and R&D, tariffs and reshoring incentives, and deregulation. The combined policies of the Trump Administration, both enacted and planned, provide a solid foundation for economic growth and will bring prosperity to all Americans.

Table 1 - Real Gross Domestic Product

Source. Bureau of Economic Analysis, Gross Domestic Product (Advance Estimate), Third Quarter 2026.

Table 2 - Labor Markets

Sources. Bureau of Labor Statistics, The Employment Situation - September 2026; Job Openings and Labor Turnover - August 2026.

Table 3 - Inflation

Sources. Bureau of Labor Statistics, Consumer Price Index - September 2026. Bureau of Economic Analysis, Personal Income and Outlays, September 2026.

¹ For CPI, 12-month growth is not seasonally adjusted.

² Imputed from CPI Data.