The U.S. economy grew faster than many forecasters expected in the third quarter, driven by steady household spending and a notable pickup in business investment associated with artificial intelligence projects, according to the Commerce Department's Bureau of Economic Analysis advance estimate for July through September.
Gross domestic product rose at a 3.4% annualized rate last quarter. Economists had forecast growth of 3.2%; estimates among analysts ranged from a 1.0% pace to a 4.2% pace.
The report highlights a divergence between the upbeat growth figures and consumers' negative assessments of the economy, a political context reflected in President Donald Trump's record-low approval ratings and a marked deterioration in consumer sentiment. The release came less than a week before Tuesday's midterm elections, which will determine control of Congress.
At a 3.4% clip, the economy is expanding well above levels some Federal Reserve officials view as consistent with stable inflation - roughly 2%. The central bank left its benchmark policy rate unchanged on Wednesday in a 3.75%-4.00% range, while noting that inflation "remains elevated." Economists had expected the Fed to raise rates in December.
Fed Chairman Kevin Warsh commented to reporters that "economic activity is expanding at a strong pace," and added that "while uncertainty remains, owing in part to geopolitical developments, domestic spending has been resilient."
While the surge in AI-related capital spending has been an important support to headline growth, some economists cautioned that this activity may overstate the underlying health of the broader economy. Investors are paying more attention to the long-term costs of AI projects, where returns remain uncertain. The article notes that technology firms have borrowed substantial sums over the past year to finance AI spending, creating a potential downside risk for future equipment spending. Economists surveyed expected this source of support to weaken over time, though they anticipated any pullback in spending to be gradual.
Consumer spending, which accounts for more than two-thirds of the economy, rose at a 3.8% annualized rate in the third quarter, the same pace recorded in the second quarter. Labor market conditions - characterized by historically low layoffs and moderate hiring - have helped sustain household outlays even as wage gains have at times lagged behind inflation.
Households have also been drawing down savings to fund consumption, reducing their buffers. With average gasoline prices still above $4 a gallon as the US-Israeli war with Iran drags on, economists expected consumer spending to slow, given the hit to real incomes from elevated pump prices.
Bottom line: Third-quarter GDP growth was stronger than many analysts anticipated, supported by consumer demand and a surge in AI-driven corporate investment, but elevated inflation and geopolitical developments present uncertainties for the outlook.