Economy grows at 3.4% pace in third quarter on consumer spending and AI investment
Growth beat forecasts and was the fastest in a year, even as higher fuel costs from the Iran war weighed on households.
WASHINGTON — The U.S. economy grew at a 3.4% annual rate from July through September, its fastest pace in a year, as consumers kept spending and businesses poured money into equipment for artificial intelligence, the government reported Thursday.
The growth in gross domestic product, the broadest measure of the economy’s output, accelerated from a 2.2% pace in the second quarter, according to the Bureau of Economic Analysis. Economists surveyed by FactSet had expected 3% growth.
On a straight quarterly basis, the economy grew 0.8%. Before adjusting for inflation, GDP rose at a 5.6% annual rate.
The report was released five days before the Nov. 3 midterm elections, in which the economy and the cost of living were top concerns for voters.
Consumers keep spending
Consumer spending, which accounts for about two-thirds of the economy, rose at a 3.8% annual rate, matching the pace of the second quarter. Spending increased on both goods and services.
Households kept spending despite higher prices for gasoline and other goods tied to the U.S. war with Iran, which has disrupted global oil shipments since late February.
Business investment surges
Business spending on equipment jumped at a 20.9% annual rate, the fastest since 2020, Reuters reported. Much of that came from companies building data centers and buying computer equipment to power AI systems.
A measure of underlying demand that excludes trade, inventories and government spending grew at a 4.9% rate, the strongest since the second quarter of 2021. That figure, known as final sales to private domestic purchasers, grew at a 4.6% rate in the second quarter.
Government spending also contributed to growth.
Imports and inflation
Trade held growth back. Exports fell, while imports rose more than they had in the second quarter. Imports subtract from GDP because they represent spending on goods made elsewhere. Imports reduced growth by about 2.6 percentage points, according to Reuters.
The report showed some easing in inflation during the quarter. A price measure tied to consumer spending, excluding food and energy, rose at a 2.5% annual rate, down from 3.3% in the second quarter.
Strong numbers, sour mood
The solid growth figures stand in contrast to how many Americans feel about the economy. Consumer prices rose 3.7% over the 12 months ending in September, and inflation-adjusted hourly wages have fallen from a year earlier for six straight months.
The economy is “growing due in part to a boost from AI,” ABC News reported earlier this month, while shoppers expect inflation to keep rising over the next year.
The Federal Reserve held interest rates steady Wednesday after raising them in September. Two officials dissented in favor of another increase, and the Fed described economic growth as “strong” in its statement.
More revisions ahead
Thursday’s report is the first of three government estimates of third-quarter growth and is based on incomplete data. It is routinely revised as more information comes in.
The Bureau of Economic Analysis will release its second estimate, along with the first look at corporate profits for the quarter, on Nov. 25.
Economists will be watching whether consumers keep up their spending into the holiday season. The National Retail Federation forecasts that holiday sales in November and December will grow 4.2% to more than $1 trillion, though it says higher prices will account for part of that gain.
The annualized rate describes how fast output would grow if the quarter’s pace continued for a full year; it is not the quarter’s actual percentage increase.
