The US economy grew faster than expected in the third quarter while inflation accelerated in September, according to new commerce department data released on Thursday, less than a week before the midterm elections that will determine control of Congress.
Gross domestic product (GDP) increased at a 3.4% annualized rate last quarter, the commerce department’s bureau of economic analysis said in its advance estimate of the third-quarter GDP on Thursday. Economists polled by Reuters had forecast GDP advancing at a 3.2% pace.
Estimates ranged from a 1% growth rate to a 4.2% pace.
The growth comes as resilient consumer spending and AI-driven business investment has more than offset the impact of higher oil prices stemming from the conflict in the Middle East.
The change is in stark contrast to households’ downbeat assessment of the economy, reflected in Donald Trump’s record-low approval ratings and a sharp deterioration in consumer sentiment.
The economy is expanding at a pace that is well above what some Federal Reserve officials regard as the non-inflationary growth rate of about 2%. New data from the personal consumption expenditures (PCE) price index, the Fed’s preferred measure of inflation, showed that prices increased 0.5% for the month in September and the annualized inflation rate rose to 3.6%. In August, the PCE’s inflation rate was 3.4%.
Core inflation, which excludes volatile food and energy prices, rose to an annualized 3.1%.
The consumer price index, a separate measure of inflation released by the Department of Labor that was released earlier in October, had also shown inflation rising in September, with the annualized inflation rate going from 3.4% in August to 3.7% in September.
Despite the rise in prices, the US central bank on Wednesday left its benchmark interest rate in the 3.75%-4% range while acknowledging that inflation “remains elevated”.
Increasing interest rates can slow inflation, at the risk of slackening economic activity and the jobs market. Because inflation is still hot, economists expect the Fed to raise rates in December. The Fed chairman, Kevin Warsh, told reporters “economic activity is expanding at a strong pace,” noting that “while uncertainty remains, owing in part to geopolitical developments, domestic spending has been resilient.”
Given the increasing dominance of AI-related spending, some economists said the strong GDP growth was probably not a true picture of the economy. Investors are increasingly focusing on the rising costs of long-term AI projects, in which the payoff is uncertain. Tech firms have borrowed huge sums over the past year for AI spending, a potential downside risk to equipment spending. Still, economists did expect this pillar of support to weaken, though a pullback in spending was likely.
Consumer spending, which accounts for more than two-thirds of the economy, increased at a 3.8% pace in the July-September quarter after growing at a 3.8% rate in the second quarter. Historically low layoffs and moderate hiring are helping to underpin spending, though wage gains have at times lagged behind inflation.
But households also have been saving less and dipping into their nest eggs to fund spending. With average gasoline prices still above $4 a gallon – about $1 a gallon more than a year ago – as the US-Israel war on Iran drags on, economists anticipate a slowdown in consumer spending.
Multiple polls have shown Donald Trump’s approval rating on the economy have plummeted in the weeks before the election, with voters citing frustration over rising gas and grocery prices. Overall consumer sentiment, measured by the University of Michigan is down 15% from February, before the start of the war with Iran, as consumers expect more inflation to come.
