The U.S. economy grew at a 3.4% annual rate from July through September, its fastest pace in a year, the Bureau of Economic Analysis reported Today, Oct. 29. Businesses pouring money into artificial intelligence and consumers who kept spending despite high prices powered the gain. Growth beat the 3.1% economists expected and topped the 2.2% pace from the spring.
Inflation did not cooperate. The personal consumption expenditures price index, the Federal Reserve’s preferred gauge, rose 0.5% in September and 3.6% over the past year. Core prices, which strip out food and energy, climbed 3.1% from a year earlier. Both readings sit well above the Fed’s 2% target.
What drove the U.S. economy in the third quarter?
Follow the money and it leads to data centers. Gross private domestic investment jumped 19.4%, led by a 20.9% surge in equipment spending as companies raced to build out artificial intelligence. Consumer spending grew 3.8%, matching the prior quarter. Government spending also added to growth, while a drop in exports pulled the other way, according to the BEA.
Real sales to private domestic purchasers, a measure Fed officials watch for underlying demand, rose 4.9%.
Why doesn’t the U.S. economy feel this strong?
This part of the report deserves a second look. Households saved just 4.1% of their after tax income in the third quarter, the lowest rate in nearly four years. Inflation adjusted after tax income fell in September, and personal income rose only 0.2% that month, short of forecasts.
Put plainly, many people are keeping up by spending down. That keeps the growth numbers bright while the cushion underneath gets thinner. For families who never had much of a cushion, the strain shows up faster.
Energy is the main source of the price pain. Gasoline and other energy goods rose 9.2% in September alone, with gas prices pushed higher by the war with Iran. Economists worry those costs are spreading. Services prices outside energy and housing rose 0.4% in September, and housing costs climbed 0.3%.
There was one bright spot. Measured across the full quarter, headline PCE prices rose at a 2.1% annual rate and core prices at 2.5%, down from 5% and 3.3% in the spring. September’s jump arrived late in the quarter, which is why the monthly and quarterly pictures look so different.
What does this mean for the Fed and your money?
The Federal Reserve held its benchmark rate at 3.75% to 4% on Wednesday. Fed Chair Kevin Warsh said officials want to weigh incoming data before their next move. Today’s numbers complicate that wait, because strong growth and hot September inflation make a rate cut harder to justify.
Layoffs remain rare. Initial jobless claims dipped to 194,000 for the week ended Oct. 24, near levels last seen in the late 1960s. Stock futures slipped after the reports, and Treasury yields fell.
Will these U.S. economy numbers change before Election Day?
Not officially. Thursday’s figure is an advance estimate built on incomplete data. The BEA will publish its second estimate Nov. 25, three weeks after voters head to the polls Nov. 3. Polls show many Americans are frustrated with the cost of living going into the midterms.
The headline says the economy is running hot. The savings rate says a lot of households are running on fumes. Voters will grade the economy by what is left in their accounts, not by the 3.4%.
