US Economy Grew at a 3.4% Pace in the Third Quarter as AI Spending Lifted Business Investment
Growth beat forecasts and accelerated from 2.2 percent, while September inflation held at 3.6 percent, a pairing that keeps a December Fed hike in play.
Thursday, October 29, 2026/2 min read
The US economy grew faster than forecasters expected over the summer, and the engine was artificial intelligence. Gross domestic product rose at a 3.4 percent annual pace from July through September, up from 2.2 percent in the spring, the Commerce Department said on Thursday, as the Associated Press reported. Economists had expected growth of about 3 percent in a FactSet survey; other surveys put the forecast at 3.2 percent.
It is the first of three estimates for the quarter and could be revised. It also arrives one day after the Fed held rates and left the door open to a December hike, as we reported in our decision story.
What drove third-quarter growth?
Business investment excluding housing jumped 12.7 percent, the AP reported, led by information-processing equipment, up 37.4 percent, with software up 9.6 percent and research and development up 7.5 percent. Consumers kept spending, with household outlays up 3.8 percent.
Housing was the drag. Residential investment fell 3.3 percent, hurt by high mortgage rates, and has declined in six of the last seven quarters. The AP also noted that the economy held up despite higher energy prices tied to the fighting with Iran.
According to FXStreet, the Bureau of Economic Analysis credited increases in investment, consumer spending and government spending, partly offset by lower exports. The GDP price index rose 2.2 percent, below the 3.5 percent forecast and well under the second quarter's 6.1 percent. The dollar barely moved.
What did the inflation data show?
Inflation did not cool. The September personal consumption expenditures price index rose 3.6 percent from a year earlier, up from 3.4 percent in August, and the core measure rose 3.1 percent, Yahoo Finance reported. Both matched expectations, and the figures supported bets on a December rate hike, which futures priced at roughly 80 percent after Wednesday's decision.
Markets took it in stride. Stocks were lower on Thursday morning because of Alphabet's slide rather than the data, and the dollar index stayed near 102.2, per FXStreet. The 3.4 percent figure is a sharp step up from the spring, and it came with business investment growing more than three times as fast as consumer spending.
What does strong growth mean for the Fed?
It strengthens the hawkish case. Growth well above forecast, with inflation at 3.6 percent and the Fed having already raised rates once this autumn, leaves little argument for cuts and keeps a hike on the table. Two committee members, Lisa Cook and Beth Hammack, voted on Wednesday for one at once.
The next Fed meeting is on 8 and 9 December. The pace of AI spending, which supplied so much of this quarter's growth, and the next inflation readings will decide whether the committee moves or waits.
Published in The Outspoken Digest
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