About that 4.3% GDP Growth Rate for Q3...

A lesson in annualized quarterly rates

On the off-chance that you enjoy arguing with family members you don’t see often over the holidays, go ahead and check out today’s WSJ Opinion section. You’ll find me with a Letter to the Editor, where I take Peter Navarro to task on the Administration’s latest attempt to gaslight the American people by shifting goalposts to a future date. I’ll post the text that I sent in at the end of this, as it also has a bunch of links that got stripped out, so you can see exactly where I’m getting my information.

The article came out just a few hours after the GDP report’s release. Naturally, within an hour of the article going live, the comment section already had this gem:

And it’s true! The Q3 GDP figures were just released yesterday and they do show a preliminary figure of 4.3% annualized growth for the third quarter of 2025. But before anyone declares “checkmate, free traders” let’s do some quick math to see what’s going on here.

A Lesson in Annualizing

First, all of the figures that the BEA releases are annualized figures. This is just fancy speak for “if this growth rate were to happen for an entire year, the overall growth rate would be this number.” As a reminder, for 2025, we had the following figures released:

• Q1: -0.6%

• Q2: +3.8%

• Q3: +4.3%

Again, these are annualized rates. To convert, you need to understand that the annual rate is calculated as:

\(\text{Annual Rate} = (1 + \text{Quarterly Rate})^4 - 1\)

Note: you have to use decimal forms of percentages, so e.g. 2% would be 0.02.

Converting from the annual rate to the quarterly rate would be:

\(\text{Quarterly Rate} = \sqrt[^4]{\text{Annual Rate} + 1} - 1\)

Plugging and chugging, we get quarterly rates of:

• Q1: -0.15%

• Q2: +0.94%

• Q3: +1.06%

The cumulative growth over the three quarters would then be +1.83%. Annualizing this figure gives us 2.47% over the three quarters. The annual growth rate for 2024, you ask?

2.8%.

So… yea. We are experiencing less economic growth during 2025 than we did during 2024.

What About 4.3%?

So what do I think about the 4.3% growth for Q3? Honestly, I am surprised but also not all that surprised. As it turns out, the American economy is incredibly resilient because the American people are incredibly resilient. It would take a massive amount of government stupidity to overcome the incredible strength of the American worker, which serves as the source of our economy’s resiliency.

Still, growth is slower this year than it was during 2024, at least so far. To get to a growth rate above what we saw in 2024, we would need to see Q4’s annualized growth rate hit over 4% again.

When is the last time we had two consecutive quarters of over 4% annualized growth? Excluding the pandemic years and the insanity for national income accounting statistics during that time (does anyone really believe that we grew at 34.9% during Q2 2020?), the last time this happened was in the 1998:

I threw in a line at 4.0% just to make it clearer just how rare 4% growth actually is, but here’s the link to the data if you want to have a look for yourself.

What will Q4 look like?

Honestly, it’s tough to tell.

On the positive side:

• You’ve got the holidays, which almost always have a lot of spending activity going on.

  • Edit: Thanks, Jeremy Horpedahl for reminding me that “seasonally adjusted” includes “holiday spending.”

• Q4 has also seen a lot of tariffs rescinded or otherwise delayed, including lowering tariffs on China (!).

And on the negative side:

• Q4 (which began on October 1) also started off with a government shutdown.

• Manufacturing employment has declined for nine consecutive months.

• Total, nonfarm job openings are basically flat, which is weird for this time of year.

• The Conference Board’s Consumer Confidence Index fell… again.

  • Lowest level since April’s Liberation Day.

My excellent colleague, Peter Earle, has also put together the annual AIER Holiday Index. Turns out, tariffs are driving a significant portion of any increased holiday spending due to… higher prices.

So what will Q4’s growth rate be? At some level, even though there are only a few more days left in it, it’s too early to tell. There are just too many countervailing points to be able to accurately assess how much weight to assign to each one.

But what I can say is this: it’s that time of year where we all can hopefully hit pause and understand that the really important stuff is being with family, friends, and loved ones. I hope you all have a wonderful holiday.

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Text I Submitted:

Peter Navarro (“Tariffs Are a Discipline, Not a Press Release,” Commentary, December 21, 2025) begins his article by knocking down a strawman. No serious economist predicted that tariffs would “immediately crash the economy” or “ignite runaway inflation.” We said that they would make Americans poorer by forcing them to pay higher prices or accept inferior substitutes, which is exactly what’s happening.

Mr. Navarro claims victory because we haven’t seen a recession just yet. True, but his colleague Howard Lutnick promised us back in March that the economy would be “humming” by now. Instead, manufacturing employment has declined for nine consecutive months, business optimism remains depressed, and consumer sentiment nears historic lows.

Notice the pattern: when tariffs don’t deliver the promised renaissance, administration officials push back the timeline. First it was weeks, then months and now, we need “the right timeline” and mustn’t grade policy “on a news cycle.” This isn’t economic analysis. It’s buying time until the economy improves despite tariffs, at which point they’ll claim victory.

On the question of who pays tariffs, Mr. Navarro collides with reality. The Harvard Pricing Lab finds that after six months, American consumers are eating 20% of the tariffs on average in the form of higher prices. For Trump’s first-term tariffs, the passthrough rate stayed under 5% for a full year. Trump 2.0’s tariffs are hitting us harder and faster and there’s evidence that this passthrough rate will only climb.

Tariffs do not “discipline” foreign producers. They discipline American families, businesses, and workers who must now pay more for less. No amount of rhetorical repackaging will change that reality.