Commerce Department reports 3.4% GDP growth in third quarter

The US economy expanded at a 3.4% annualized rate in the third quarter, according to the bureau of economic analysis. This figure, released on Thursday, exceeded the 3.2% pace forecast by economists polled by Reuters. The report arrived less than a week before the midterm elections on Tuesday.

First, the growth was fueled by resilient consumer spending and business investment in artificial intelligence. These sectors more than offset the drag from higher oil prices. The increase in the Middle East conflict has kept energy costs elevated, yet domestic demand remained strong.

Second, the data reveals a disconnect between hard economic indicators and public perception. Households have expressed a downbeat view of the economy, a sentiment reflected in President Donald Trump’s record-low approval ratings. Consumer sentiment has deteriorated sharply, even as the gross domestic product grows well above the 2% non-inflationary rate cited by Federal Reserve officials.

Third, the central bank maintained its benchmark interest rate in the 3.75% to 4% range on Wednesday. Chairman Kevin Warsh stated that economic activity is expanding at a strong pace. He noted that domestic spending has been resilient, though he acknowledged uncertainty stemming from geopolitical developments. Economists generally expect the Fed to raise rates in December.

Contextualizing the numbers, analysts caution that the strong GDP may not fully reflect the broader economy. The growth is heavily driven by AI-related spending, which some view as a potential downside risk. Tech firms have borrowed large sums for these projects, and investors are watching the rising costs of long-term initiatives with uncertain payoffs.

Consumer spending, which accounts for more than two-thirds of the economy, rose at a 3.8% pace in the July to September quarter. This matches the growth rate seen in the second quarter. Low layoffs and moderate hiring have supported this spending, although wage gains have occasionally lagged behind inflation.

Households are saving less and drawing down savings to fund their purchases. Average gasoline prices remain above $4 a gallon as the US-Israel war on Iran continues. Economists anticipate a slowdown in consumer spending as these costs persist.