By Andrew Moran
The U.S. economy recorded its best quarter in a year as consumer spending and business investment lifted growth above expectations.
Real GDP growth was 3.4 percent in the third quarter, from 2.2 percent in the previous three-month period, according to Bureau of Economic Analysis data released on Oct. 29.
The Atlanta Federal Reserve downgraded its third-quarter estimate the day before the bureau’s report. The regional central bank’s widely watched GDPNow Model projected a 3.3 percent expansion, down from a peak above 6 percent in July.
The consensus estimate among economists had also penciled in growth of 3.2 percent.
Consumer spending surged 3.8 percent for the second consecutive quarter, the bureau said.
Consumers have been a key theme for the U.S. economy. Despite their downbeat view of current economic conditions, consumers have been resilient since the pandemic.
But public- and private-sector data have diverged over the past month.
Retail sales jumped 0.8 percent in September, but gasoline station receipts drove the better-than-expected rise. Stripping out gas and automotive dealerships, retail sales ticked up just 0.2 percent.
Bank of America, however, said credit and debit card spending per household—excluding gasoline—rose 5.1 percent year-over-year. Additionally, looking ahead to the holiday-driven fourth quarter, the National Retail Federation forecasts record spending, topping $1 trillion for the first time.
Business investment was the top factor for the better-than-expected expansion, climbing almost 13 percent from July to September.
With 21 percent growth in equipment and 8.4 percent in intellectual property products, artificial intelligence (AI) investments were a sizable contributor.
Capital expenditures—also known as capex—have accelerated to their highest levels on record, according to Federal Reserve Chairman Kevin Warsh. Much of this is concentrated in the ongoing AI infrastructure buildout, with companies investing billions in everything from data centers to semiconductors.
So far this earnings season, the tech giants have committed to maintaining or expanding capex spending through 2027. This has raised investor concerns about the return on these investments and the challenge companies may face in raising funds.
Warsh said after the Oct. 28 policy meeting that overall financial conditions have tightened a bit since last month’s quarter-point interest rate hike. But he noted that “I’m unwilling and unable to call them tight.”
Meanwhile, Nvidia CEO Jensen Huang and SpaceX CEO Elon Musk have cautioned that capital has become scarcer lately, creating another challenge for firms tapping debt markets to fund the AI buildout.
Trade dragged down growth in the July–September period as net exports subtracted from the GDP. Quarterly exports fell nearly 6 percent, while imports rocketed close to 20 percent.
Recent data suggest imports have accelerated as U.S. companies bolster purchases of foreign capital goods. August’s trade deficit was $105.6 billion, the widest gap since March 2025.
Government outlays also padded the final GDP reading, with consumption expenditures growing 5.3 percent.
The fourth quarter is expected to record similar growth, with the busy holiday season contributing to the expansion.
The New York Fed Staff Nowcast estimates the economy will grow at a rate of 2.8 percent annually in the October–December quarter.
S&P Global economists estimate fourth-quarter GDP coming in at 2.2 percent.
“Private domestic demand remains solid, with consumer spending holding up better than we anticipated three months ago, alongside a relatively stable labor market and strong AI-related spending,” they said in a Sept. 23 research note.
A factor heading into 2027 could be Federal Reserve policy.
Officials voted 10–2 to leave interest rates unchanged on Oct. 28, but they have signaled one more rate hike before the year’s end. Traders have also penciled in another rate increase sometime next year.
But with inflation being largely driven by the oil-price shock, economists are skeptical that a hawkish stance will restore the 2 percent inflation target.
“Does this Fed really believe adding more pain to middle- and low-income consumers to ’solve’ interest-rate-insensitive inflation is constructive?” Byron Anderson, head of fixed income at Laffer Tengler Investments, told The Epoch Times in an emailed note.
“Uncertainty and volatility are going to stay elevated, and there is no reason for the Fed to pour gasoline on the fire with rate hikes that will do nothing.”
Warsh, in his post-meeting press conference, insisted that he and his colleagues will not stomach any inflation above 2 percent.
“If you think that we’re tolerating some inflation target somewhere in the twos, let us disabuse you of it,” the central bank chief told reporters.
The Fed’s preferred inflation measure—the Personal Consumption Expenditure (PCE) Price Index—climbed to an annual rate of 3.6 percent in September. Excluding energy and food, the 12-month core PCE inflation rate rose to 3.1 percent.
Both readings were in line with market estimates.
