US economy grows 3.4% in third quarter as inflation accelerates before midterms

The US economy grew faster than economists expected in the third quarter while inflation accelerated again in September, according to commerce department data published on Thursday — less than a week before midterm elections that will decide control of Congress.

Gross domestic product rose at a 3.4% annualized rate between July and September, the department's Bureau of Economic Analysis said in its advance estimate. Economists polled by Reuters had forecast 3.2%, and individual estimates ranged from 1% to 4.2%.

Resilient consumer spending and AI-driven business investment have more than offset the effect of higher oil prices linked to the conflict in the Middle East.

Growth above the Fed's comfort zone

The expansion is well above the roughly 2% pace that some Federal Reserve officials regard as non-inflationary. The personal consumption expenditures price index, the Fed's preferred inflation measure, showed prices up 0.5% for September, with the annual rate rising to 3.6% from 3.4% in August. Core inflation, which excludes food and energy, reached 3.1%.

The separate consumer price index, released by the Department of Labor earlier in October, also showed annual inflation climbing, from 3.4% in August to 3.7% in September.

The central bank left its benchmark interest rate in the 3.75%-4% range on Wednesday while acknowledging that inflation "remains elevated". Higher rates can slow inflation but risk weakening economic activity and the jobs market, and economists expect the Fed to raise rates in December. Fed chair Kevin Warsh told reporters that economic activity was expanding "at a strong pace" and that domestic spending had been resilient even as uncertainty remained, partly because of geopolitical developments.

Consumers and AI spending

Consumer spending, which accounts for more than two-thirds of the economy, grew at a 3.8% pace, matching the second quarter. Historically low layoffs and moderate hiring are supporting spending, though wage gains have at times lagged inflation, and households have been saving less and dipping into their nest eggs.

Average gasoline prices remain above $4 a gallon — about $1 more than a year earlier — as the US-Israel war on Iran continues, and economists anticipate a slowdown in consumer spending. Consumer sentiment measured by the University of Michigan is down 15% from February, and multiple polls show Donald Trump's approval rating on the economy has fallen sharply before the vote, with voters citing gas and grocery prices.

Some economists cautioned that the strong GDP figure may not give a true picture of the economy, given the growing weight of AI-related spending. Tech firms have borrowed heavily over the past year for AI projects with uncertain payoffs, a potential downside risk to equipment spending, although economists expected that pillar of support to weaken.

Source: The Guardian Business.