Key Takeaways
- • The US economy grew at an annualized real GDP rate of 3.4% in the third quarter, according to the Bureau of Economic Analysis' preliminary release, faster than the 3.2% consensus estimate and up from 2.2% in the second quarter.
- • Consumer spending, which accounts for more than two-thirds of economic output, grew 3.8% in the third quarter, even as households saved just 4.1% of after-tax income, the lowest rate in nearly four years.
- • Business investment grew 12.7% and accounted for more than half of total GDP growth, with equipment investment up 20.9% on the data center build-out tied to the AI boom.
- • The Personal Consumption Expenditures price index, the Federal Reserve's preferred inflation gauge, rose 3.6% year over year in September, well above the 2% target.
- • The Fed held rates at 3.75% to 4% for a second consecutive meeting, and investors are largely pricing in a quarter-point hike at the December meeting.
Summary
The US economy grew faster than expected in the third quarter, with real gross domestic product increasing at an annual rate of 3.4%, according to a preliminary release from the Bureau of Economic Analysis on Thursday. The figure exceeded the 3.2% pace analysts had estimated and marked an acceleration from growth of 2.2% in the second quarter. The data covers July, August and September.
Consumer spending grew 3.8% in the third quarter, supporting growth even as households faced high gasoline prices and record-low consumer sentiment. Consumer prices rose 3.5% over the same period, driven by higher gasoline and oil prices tied to the Iran war, which has disrupted energy shipments and damaged Middle East facilities. Households showed signs of strain: they saved just 4.1% of after-tax income, the lowest rate in nearly four years, and were dipping into savings and taking on debt. Inflation-adjusted after-tax income rose over the quarter overall but fell in September.
Artificial intelligence investment was the largest contributor to growth. Business investment rose 12.7%, accounting for more than half of total GDP growth, with equipment investment up 20.9% as companies spent hundreds of billions of dollars on data centers and computing capacity and planned to spend trillions more in coming years. Analysts cautioned that these figures may overstate domestic contribution because many data center chips and parts are imported, though the buildout still requires domestic components and labor.
Inflation remains elevated. The Personal Consumption Expenditures price index, the Federal Reserve's preferred gauge, rose 3.6% in September from a year earlier, far above the central bank's 2% goal. The Fed held its benchmark rate in the 3.75% to 4% range at its latest meeting for a second consecutive time, and investors broadly expect a quarter-point increase at the December meeting.
Market reaction was mixed in interpretation. Chris Zaccarelli, chief investment officer at Northlight Asset Management, said in a note that the data is a "bad news/bad news story" for rates, since higher inflation and growth argue for higher rates, but an "okay news/good news story" for equity investors. He added that current inflation levels are not terrible and that growth remains very strong.
Consumer spending grew 3.8% in the third quarter, supporting growth even as households faced high gasoline prices and record-low consumer sentiment. Consumer prices rose 3.5% over the same period, driven by higher gasoline and oil prices tied to the Iran war, which has disrupted energy shipments and damaged Middle East facilities. Households showed signs of strain: they saved just 4.1% of after-tax income, the lowest rate in nearly four years, and were dipping into savings and taking on debt. Inflation-adjusted after-tax income rose over the quarter overall but fell in September.
Artificial intelligence investment was the largest contributor to growth. Business investment rose 12.7%, accounting for more than half of total GDP growth, with equipment investment up 20.9% as companies spent hundreds of billions of dollars on data centers and computing capacity and planned to spend trillions more in coming years. Analysts cautioned that these figures may overstate domestic contribution because many data center chips and parts are imported, though the buildout still requires domestic components and labor.
Inflation remains elevated. The Personal Consumption Expenditures price index, the Federal Reserve's preferred gauge, rose 3.6% in September from a year earlier, far above the central bank's 2% goal. The Fed held its benchmark rate in the 3.75% to 4% range at its latest meeting for a second consecutive time, and investors broadly expect a quarter-point increase at the December meeting.
Market reaction was mixed in interpretation. Chris Zaccarelli, chief investment officer at Northlight Asset Management, said in a note that the data is a "bad news/bad news story" for rates, since higher inflation and growth argue for higher rates, but an "okay news/good news story" for equity investors. He added that current inflation levels are not terrible and that growth remains very strong.
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