U.S. economy growth accelerates in third quarter

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U.S. economy growth Q3

Highlights

U.S. Q3 GDP grows at a 3.4% annualized rate, exceeding economist expectations of 3.2% and entering the top end of 1.0%-4.2% forecasts.
Consumer spending rises 3.8% in Q3, bolstered by low layoffs and moderate hiring, maintaining the same pace as the previous quarter.
Tech sector's increased AI-related investment and heavy borrowing start driving long-term costs, while consumers reduce savings amid persistent inflation and gasoline prices above $4 per gallon.

Third-quarter growth beats forecasts

As reported by Reuters, citing the Commerce Department's Bureau of Economic Analysis, U.S. gross domestic product increases at a 3.4% annualized rate in the third quarter, above the 3.2% pace economists polled by Reuters expect.

Estimates range from 1.0% growth to 4.2%. The advance GDP estimate is published less than a week before Tuesday's midterm elections, which will determine control of Congress.

The stronger reading contrasts with households' weak view of the economy, reflected in President Donald Trump's record-low approval ratings and a sharp deterioration in consumer sentiment.

Consumer demand and AI spending support outlook

Consumer spending, which accounts for more than two-thirds of the economy, increases at a 3.8% pace in the July-September quarter after growing at the same rate in the second quarter. Historically low layoffs and moderate hiring continue to support spending, though wage gains at times lag inflation.

The Federal Reserve leaves its benchmark interest rate in the 3.75% to 4.00% range while saying inflation remains elevated, and economists expect a rate increase in December. Fed Chairman Kevin Warsh says economic activity is expanding at a strong pace, though uncertainty remains because of geopolitical developments.

Some economists say the strong GDP figure may not fully reflect underlying conditions because of the growing dominance of AI-related investment. Investors are paying closer attention to the rising cost of long-term AI projects and the large borrowing by tech firms to fund that spending, while households are saving less and drawing on nest eggs as gasoline prices stay above $4 a gallon during the U.S.-Israeli war with Iran.

In our earlier article on the S&P 500’s push toward 8,000, we noted that the rally has been heavily driven by AI-linked megacaps even as investors face headwinds from elevated Treasury yields, higher oil prices, and uncertainty ahead of the midterm elections. The piece highlighted concerns about market concentration and weakening breadth, alongside scrutiny of whether third-quarter earnings growth can meet a rising bar as financing exposure to long-term AI projects draws more attention.

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