U.S. economic growth was robust over the summer, as businesses poured money into artificial intelligence and consumers kept spending despite high prices that have soured their mood ahead of midterm elections next week.
Gross domestic product, the broadest measure of goods and services produced in the country, increased at a 3.4 percent annual rate in the third quarter, adjusted for inflation, the Bureau of Economic Analysis said Thursday.
That was an acceleration from the 2.2 percent rate in the spring, and was the fastest growth in a year. Consumer spending, which accounts for more than two-thirds of economic output, grew at a 3.8 percent rate.
The strong spending and growth figures contrast with the poor marks that many voters are giving the economy as they head to the ballot box for next week’s midterm elections. Polls consistently show that Americans are frustrated with the high cost of living and hold President 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 percent in the third quarter from a year earlier, driven in part by high gas prices that are the direct result of Mr. Trump’s decision to go to war with Iran. Americans are increasingly dipping into their savings to keep up with rising costs. Households, in the aggregate, saved just 4.1 percent of their after-tax income in the third quarter, the lowest rate in nearly four years. After-tax income, adjusted for inflation, rose in the third quarter as a whole but fell in September.
“The data on the economy are something to celebrate, but they look better on paper than they feel to most Americans,” said Diane Swonk, chief economist for KPMG, the accounting firm. And while the strength in the economy is real, she said, it is unequally distributed: Wealthy households are benefiting from growing stock portfolios, while wages, adjusted for inflation, have fallen over the past year.
“When you have a very large middle class and all boats are lifting with the tide, more people feel good about the economy,” Ms. Swonk said. “This has more of the feeling of some people in yachts and some people with no boats at all.”
Still, the data released Thursday, which is preliminary, is the latest evidence that while Americans may be unhappy about inflation, they haven’t pulled 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 U.S. 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.”
That could be a problem for officials at the Federal Reserve, who are trying to bring down inflation after five years above their goal of 2 percent annual price increases. On Wednesday, policymakers decided against raising interest rates for a second straight meeting, a gradual approach that some economists warn runs the risk of allowing inflation to become more entrenched.
The A.I. investment boom is responsible, directly and indirectly, for much of the economy’s resilience. Companies have invested hundreds of billions of dollars into building data centers and related infrastructure this year, with trillions more planned by 2030. That has rippled through the economy, lifting the fortunes not just of chipmakers and computer equipment manufacturers but also of companies seemingly far removed from the tech sector, like the producer of the gray paint used inside many data centers.
Investment in equipment grew at an astonishing 20.9 percent annual rate in the third quarter, and overall business investment grew at a 12.7 percent annual rate, accounting for more than half of G.D.P. growth. Those numbers are somewhat misleading, because many of the computer chips and other parts used in data centers are produced overseas, and therefore aren’t considered part of domestic output. Imports grew at a nearly 20 percent rate in the third quarter, in large part because of shipments of computer equipment.
Companies’ A.I. investments require domestic parts and labor too, however. That is helping to offset weakness elsewhere in the economy, particularly the housing market, which has been hit hard by high interest rates. Residential investment, which includes housing construction, contracted for the sixth time in the past seven quarters.
Investor enthusiasm for all things A.I. has also helped push up share prices, which, in turn, has supported consumer spending, especially among wealthy households. Economists disagree about exactly how big a role this “wealth effect” is playing in the strong spending figures, but few doubt that it is important.
“The resiliency story has been about the connection between A.I.-related spending, asset markets and the upper-end consumer,” said Michael Gapen, chief U.S. economist for Morgan Stanley.
The economy’s reliance on A.I. as a source of growth could turn into a vulnerability if the boom falters. Concerns have mounted in recent weeks as investors have begun to scrutinize some of the companies behind the A.I. build-out, and to raise questions about whether the massive spending will pay off.
“The way I look at the economy now is, in one word, fragile,” said Ryan Cummings, the chief of staff for the Stanford Institute for Economic Policy Research. “You have this fragile consumption happening from the stock-market gains. And the stock market gains themselves in my view are incredibly fragile.”
Other economists are more optimistic, arguing that demand for A.I.-related infrastructure is likely to keep growing even if investors sour on individual companies. And they point to sources of strength outside A.I., especially the low unemployment rate, which has allowed Americans to keep spending.
“Never, ever underestimate the capacity of the American consumer to find things to spend money on as long as they have jobs,” Mr. Bhave said.
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