WASHINGTON – The US economy grew faster than expected in the third quarter as resilient consumer spending and AI-driven business investment more than offset the impact of higher oil prices stemming from the conflict in the Middle East.
Gross domestic product (GDP), the broadest measure of goods and services produced in the country, increased at a 3.4% annual rate in the third quarter, adjusted for inflation, the Bureau of Economic Analysis said on Oct 29.
That was an acceleration from the 2.2% rate in the second quarter, and was the fastest growth in a year.
The strength in growth is in stark contrast to households’ downbeat assessment of the economy, reflected in President Donald Trump’s record-low approval ratings and a sharp deterioration in consumer sentiment.
The report was published less than a week before the midterm elections on Nov 3, which will determine control of Congress.
Polls consistently show that Americans are frustrated with the high cost of living and hold Trump and congressional Republicans responsible for failing to deliver on their promises to improve affordability.
Those frustrations are grounded in reality. Consumer prices were up 3.5% in the third quarter from a year earlier, driven in part by high gas prices that are the direct result of Trump’s decision to go to war with Iran.
Still, the data released on Oct 29, which is preliminary, is the latest evidence that while Americans may be unhappy about inflation, they have not started to pull back their spending.
That has helped keep the economy on track through a tumultuous period, but it could also be contributing to inflation by making it easier for businesses to pass on price increases to customers.
“This is a hot economy,” said Aditya Bhave, head of US economics for Bank of America. “That’s the good news. The bad news is that inflation is the price we pay for that hot economy, and inflation is going to remain elevated.”
The economy is expanding at a pace that is well above what some Federal Reserve officials regard as the non-inflationary growth rate of around 2%.
The US central bank on Oct 28 left its benchmark interest rate in the 3.75% to 4% range while acknowledging that inflation “remains elevated”.
Economists expected the Fed to raise rates in December.
Fed Chairman Kevin Warsh told reporters “economic activity is expanding at a strong pace”, noting that “while uncertainty remains, owing in part to geopolitical developments, domestic spending has been resilient”.
Given the increasing dominance of AI-related spending, some economists said the strong GDP growth was probably not a true picture of the economy.
Investors are increasingly focusing on the rising costs of long-term AI projects in which the payoff is uncertain. Tech firms have borrowed huge sums over the past year for AI spending, a potential downside risk to equipment spending.
Still, economists did expect this pillar of support to weaken, though a pullback in spending was likely.
Consumer spending, which accounts for more than two-thirds of the economy, increased at a 3.8% pace in the July-September quarter after growing at a 3.8% rate in the second quarter.
Historically low layoffs and moderate hiring are helping to underpin spending, though wage gains have at times lagged inflation.
But households also have been saving less and dipping into their nest eggs to fund spending. With average gasoline prices still above US$4 a gallon as the US-Israeli war with Iran drags on, economists anticipated a slowdown in consumer spending. REUTERS
