The U.S. economy grew at an annual rate of 3.4 percent from July through September, as businesses rushed to capitalize on the boom in artificial intelligence and consumers continued spending despite high prices
Growth rebounded from the previous quarter’s 2.2 percent annual pace, the Commerce Department said, delivering good news for Republicans hoping to maintain their congressional majorities in the Nov. 3 election.
Massive investment in the nationwide build-out of AI infrastructure continues to power the economy as “hyperscalers” such as Alphabet, Microsoft and Meta race to erect new computing facilities.
Nonresidential investment in the three-month period rose by 12.7 percent. Business spending on equipment, driven largely by AI, vaulted higher at a 20.9 percent annual rate.
Consumer spending increased by 3.8 percent, though signs of strain were evident. Health care and restaurant meals were among consumers’ top purchases.
Fallout from the war with Iran continued to cost Americans. Prices in September were 3.6 percent higher than one year ago, according to the central bank’s preferred gauge, the personal consumption expenditures index. Excluding volatile food and energy costs, the index rose by 3.1 percent, up from 3 percent in August, said a separate government report.
Thursday’s reports reflected a continuation of the economy’s Jekyll-and-Hyde nature.
“The economy’s very strong, and it has an inflation problem,” said economist Michael Strain of the American Enterprise Institute. “I don’t think those two characteristics are unrelated.”
The economy’s underlying strength is greater than the gross domestic product (GDP) growth rate suggests, according to another metric that many economists use.
Adjusted for inflation, sales to domestic purchasers — or total spending by consumers and private businesses, excluding inventories — soared by 4.9 percent. That was the fastest pace in more than five years.
The Trump administration has taken credit for the growing economy, citing President Donald Trump’s signature tax legislation, which encouraged business investment and resulted this year in larger-than-usual refunds for individuals.
The White House on Thursday slammed “so-called experts” who had predicted slower growth for underestimating the economy’s vigor.
“President Trump’s pro-growth agenda of cutting taxes and eliminating red tape is unleashing the full potential of the American economy,” said Matthew Middleton, a White House spokesman. “With the President’s American First agenda taking effect, this economy will continue to defy expectations and deliver results for the American people.”
Still, the economy is now growing at a pace that it cannot maintain without aggravating inflation, according to Congressional Budget Office estimates. Economists surveyed by Bloomberg News expect growth to slow in coming months to an annual rate of about 2.2 percent.
While business investment and consumer spending were the main engines driving growth over the past three months, government spending contributed nearly a full percentage point to the economy’s forward momentum.
Americans’ struggle to cope with rising prices was evident in the Commerce Department assessment. Adjusted for inflation, personal income fell in September to its lowest mark since May.
Consumers are draining their savings to maintain their standard of living. The personal savings rate fell to just 3.8 percent in September and has been cut nearly in half since the start of 2024.
The economy expanded despite the effects of foreign trade. Imports, which are effectively subtracted from the government’s GDP calculation, jumped as businesses bought more foreign equipment for new AI data centers.
In September, the monthly U.S. trade deficit was nearly $135 billion, up more than 2 percent from the previous month and the highest figure in 18 months, the Census Bureau said Wednesday.
Still, just five days before voters head to the polls, the economy — apart from the cost of living — appears to be in good shape. On Wednesday, Federal Reserve Chair Kevin Warsh pronounced the economy “strong,” an upgrade over the central bank’s description last month of “solid” activity.
Inflation, which has exceeded the Fed’s 2 percent target for nearly six years, remains the economy’s principal shortcoming. And just days before the congressional elections, it is costing Republicans support.
For the first time in more than a decade, Democrats are more trusted to deal with the economy. By a margin of 37 percent to 28 percent, U.S. adults prefer the Democrats over the Republicans who control both the House and Senate, according to a Washington Post-ABC News-Ipsos poll this month.
Most investors expect the Fed to raise short-term interest rates by a quarter of a percentage point at its next policymaking meeting in early December.
Despite inflation that Warsh labeled “elevated,” the Fed left its benchmark interest rate unchanged on Wednesday.
“Economic growth has strengthened,” Warsh told reporters. “Real activity is clearly pointing in the right direction. That’s good news. But inflation is too high.”
Thursday’s GDP estimate will be revised at least twice as government statisticians gather more data.
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