US Economy Grows 3.4 Percent in the Third Quarter as Inflation Edges Higher

The United States economy grew at a 3.4 percent annual rate in the third quarter, its fastest pace in almost three years, as a surge in artificial intelligence investment and steady consumer spending carried growth well past the second quarter. The Bureau of Economic Analysis released its first estimate for the July to September period on Thursday. Growth accelerated from a 2.2 percent pace in the second quarter and came in above the 3.1 percent increase that economists surveyed by The Wall Street Journal had forecast.

A second report released at the same time showed inflation moving the other way. The personal consumption expenditures price index, the inflation gauge the Federal Reserve watches most closely, rose 0.5 percent in September, its biggest monthly increase in six months. Over the year, headline PCE inflation climbed to 3.6 percent from 3.4 percent in August. The core index, which strips out food and energy, rose 0.3 percent on the month and 3.1 percent over the year, up from 3.0 percent in August, matching forecasts.

AI spending and consumers drive growth

Reporting on the figures pointed to two engines. Businesses kept spending heavily to build out artificial intelligence capacity, from data centers to the equipment inside them, and households kept spending, led by wealthier Americans supported by high stock values and low unemployment. Kathy Bostjancic, the chief economist at Nationwide, wrote that strong AI spending continues to drive business investment, with spillovers and strengthening capital spending outside technology even amid higher borrowing rates and energy costs. The soft spot in the economy remains hiring, which has run at a sluggish pace even as output accelerates, and trade was expected to subtract from growth.

A difficult mix for the Federal Reserve

The pairing of faster growth and hotter inflation landed one day after the Federal Reserve left its benchmark rate unchanged in a range of 3.75 percent to 4.00 percent. The central bank raised rates in September, and officials have pointed to December as the next decision point. Chair Kevin Warsh said the next six weeks would be information rich, and the September PCE reading is a central piece of that information. Market pricing on Thursday put the odds of a quarter point increase at the December 9 meeting at 83 percent. Analysts tie this year's inflation to higher oil prices linked to the war with Iran and to the lingering effects of United States tariffs, and they expect price growth to slow next year if energy costs ease.

Markets and the road ahead

Stock futures pointed lower after the data, with S and P 500 futures down 0.4 percent in early trading on Thursday, after a three session winning streak had left the index about 1 percent below its October 6 record close. The GDP report is the last major reading on the economy before Tuesday's midterm elections. Economists expect growth to cool somewhat in the fourth quarter without stalling, which leaves inflation as the open question for the rest of the year.