US Economy Grows 3.4% in Third Quarter as Consumers and AI Spending Outrun Forecasts
The US economy grew faster than expected over the summer, a result that makes a further interest rate increase look more likely and keeps pressure
The US economy grew faster than expected over the summer, a result that makes a further interest rate increase look more likely and keeps pressure on borrowing costs worldwide. Gross domestic product expanded at a 3.4% annualized rate in the third quarter, the Commerce Department reported on Thursday.
That beat the 2.2% pace of the second quarter and the 2.5% rate of the first. Forecasters had expected less. A FactSet survey projected 3%, while economists polled looked for 3.2%, with estimates ranging from 1.0% to 4.2%. The New York Post described it as the fastest growth in a year.
Households keep spending
Consumers did the heavy lifting. Household spending rose at a 3.8% rate, even with higher energy costs tied to the fighting with Iran and the wider conflict in the Middle East.
Business investment excluding housing climbed 12.7%. Spending on information processing equipment jumped 37.4%, software rose 9.6%, and research and development gained 7.5%, all pushed along by the artificial intelligence boom.
Housing was the weak spot. Residential investment fell 3.3% under the weight of high mortgage rates, its sixth decline in seven quarters.
A Fed with little reason to cut
The report landed one day after the Federal Reserve held its benchmark rate at 3.75%-4.00% and said inflation "remains elevated." Prices rose 3.7% in September from a year earlier. Fed Chair Kevin Warsh told reporters that economic activity is expanding at a strong pace and that domestic spending has been resilient, though uncertainty remains.
Growth at this level sits well above the roughly 2% that some Fed officials consider consistent with stable inflation. Traders have taken note: CME Group's FedWatch Tool put the odds of a quarter-point hike at the December meeting at about 85%.
Strong data, sour mood
The numbers clash with how Americans say they feel. Consumer sentiment has deteriorated sharply, and President Donald Trump's approval ratings are at record lows. The data arrived less than a week before Tuesday's midterm elections, which will decide control of Congress.
For now, the next test is the December Fed meeting, where the strength of this quarter will be weighed against inflation that has not cooled.
