US Economy Grows 3.4% as Inflation Hits 3.7%

The US economy grew faster than expected in the third quarter, and inflation picked up in September, according to Commerce Department data released on Thursday. The figures arrived less than a week before the midterm elections that will decide control of Congress.

Gross domestic product rose at a 3.4% annualized rate, the Bureau of Economic Analysis said in its advance estimate. Economists polled by Reuters had forecast 3.2%. Estimates ranged from 1% growth to 4.2%.

That pace is well above the roughly 2% growth rate that some Federal Reserve officials regard as non-inflationary.

Resilient consumer spending and AI-driven business investment more than offset the effect of higher oil prices tied to the conflict in the Middle East. Consumer spending, which makes up over two-thirds of the economy, grew at a 3.8% pace in July to September, the same rate as in the second quarter. Historically low layoffs and moderate hiring are supporting it, though wage gains have at times lagged behind inflation.

Prices keep rising

The personal consumption expenditures price index, the Federal Reserve's preferred inflation gauge, rose 0.5% in September. Its annualized rate climbed to 3.6% from 3.4% in August. Core inflation, which strips out food and energy, rose to 3.1%.

The consumer price index, released earlier in October, showed inflation going from 3.4% in August to 3.7% in September.

On Wednesday the Fed left its benchmark rate in the 3.75% to 4% range and said inflation "remains elevated". Because inflation is still hot, economists expect the central bank to raise rates in December. Fed chairman Kevin Warsh told reporters that "economic activity is expanding at a strong pace" and that "domestic spending has been resilient", while uncertainty remains.

Doubts about the strength

Some economists said the strong growth was probably not a true picture of the economy, given how much AI-related spending now drives it. Tech firms have borrowed large sums for AI projects with uncertain payoff, which could weigh on equipment spending. Economists still expected this support to weaken, with a pullback likely.

Households are also saving less and dipping into savings to fund spending. Average gasoline prices remain above $4 a gallon, about $1 more than a year ago, while the US-Israel war on Iran drags on. Economists anticipate a slowdown in consumer spending.

The figures contrast with households' own view. Donald Trump's approval rating on the economy has fallen in multiple polls, with voters citing rising gas and grocery prices. The University of Michigan's consumer sentiment measure is down 15% from February, before the war with Iran began.

Source: The Guardian