U.S. GDP grows at fastest pace in a year in 3Q, while September inflation accelerates

The U.S. economy grew at an annualized pace of 3.4% in the third quarter, according to an advance estimate of gross domestic product released by the U.S. Bureau of Economic Analysis (BEA). That exceeded economists’ forecast of 3.1% and was well above the second quarter’s 2.2% growth clip, CNBC reports. Robust business investment and resilient consumer spending helped drive the expansion, Bloomberg notes. The third quarter marked the U.S. economy’s fastest growth in a year.

The world’s largest economy continued to benefit from strong business investment, much of it tied to AI spending, Bloomberg writes. Equipment spending made its biggest contribution to third-quarter GDP growth since 2011, outside of the pandemic rebound.

The report was the last major snapshot of the U.S. economy before next week’s midterm elections, Bloomberg notes. The results will determine which party controls Congress for the final two years of President Trump’s term.

Meanwhile, inflationary pressures persist. Alongside the GDP data, the BEA released the September personal consumption expenditures price index. It rose 3.6% year over year and 0.5% month over month, the biggest monthly increase since March, Bloomberg notes. The inflation data partially matched the consensus forecast from economists polled by FactSet, Morningstar reports. They had expected increases of 3.7% and 0.5%, respectively. In August, PCE inflation stood at 3.4% year over year and 0.3% month over month.

September’s core PCE price index, the Fed’s preferred inflation gauge, which excludes volatile food and energy prices, fully matched expectations. It rose 0.3% month over month and 3.1% year over year. That marked a slight acceleration from August’s readings of 0.2% and 3.0%, respectively.

Economists are watching closely for signs that businesses are passing higher fuel costs on to consumers, Morningstar writes. That is a key question for policymakers as they assess how persistent this year’s inflationary pressures will prove. Still, some economists believe the inflation report will have little bearing on U.S. monetary policy in the near term. “The August numbers were very encouraging; even a hotter-than-expected print would only partially erase that good news,” said Christopher Hodge, chief U.S. economist at Natixis.

Hodge added that the consumer and producer price indexes released earlier this month had primed economists for an acceleration in PCE inflation. While inflation is the Fed’s primary focus, it cannot be its sole concern given recent jitters in credit markets, he said. It would take a core PCE reading well outside the consensus, such as a monthly increase of 0.1% on the low side or 0.5% on the high side, to meaningfully change the outlook, in his view. Hodge expects Fed officials to raise rates by a quarter percentage point in December.

On Wednesday, the Fed paused after September’s rate hike, leaving rates unchanged.

Futures on the major U.S. stock indexes remained in the red following the economic data. They had turned negative several hours earlier after earnings reports from Alphabet and Microsoft revived doubts about whether multibillion-dollar AI investments would deliver sufficient returns. At the time of this writing, S&P 500 futures were down 0.3%, Nasdaq 100 futures had fallen 0.94%, and Dow Jones futures were off 0.2%.

Traders maintained their expectations for a Fed rate increase in December, pricing in an 83% probability, according to data from CME FedWatch.

The GDP and PCE inflation data was released a day after the Fed decided to leave rates unchanged. Policymakers offered no clear signal of a possible rate increase at their next meeting in December. However, Fed Chair Kevin Warsh emphasized at his press conference that officials had “made clear our readiness to act as circumstances require,” Bloomberg reports.

Warsh dismissed suggestions that the U.S. economy was beginning to overheat but highlighted several signs of stronger-than-expected economic activity, including resilient consumer spending and solid business investment. As a result, he said, discussions at the meeting centered on inflation.

Warsh also announced that the Fed would gradually adopt an adjusted meeting schedule, making rate decisions at seven of its eight meetings next year. In 2028, he added, two of the eight meetings would be devoted to broader discussions rather than rate decisions.