US economy grows faster than expected 3.4% in 3Q, driven by consumers, AI investment

The US economy grew faster than expected in the third quarter as resilient consumer spending and AI-driven business investment more than offset the impact of higher oil prices stemming from the conflict in the Middle East.

Gross domestic product increased at a ‌3.4 per cent annualised rate last quarter, the Commerce Department’s Bureau of Economic Analysis said in its advance estimate of third-quarter GDP on Thursday. Economists polled by Reuters had forecast GDP advancing at a 3.2 per cent pace.

Estimates ranged from a 1 per cent growth rate to a 4.2 per cent pace.

The strength in growth is in stark contrast to households’ downbeat assessment of the economy, reflected in President Donald Trump’s record-low approval ratings and ⁠a sharp deterioration in consumer sentiment. The report was published less than a week before Tuesday’s midterm elections, which will determine ‌control of Congress.

The economy is expanding at a pace that is well above what some Federal Reserve officials regard as the non-inflationary growth rate of around 2 per cent. The US ‌central bank on Wednesday left its benchmark interest rate in the 3.75 per cent to 4 per cent range while acknowledging that ⁠inflation “remains elevated”.

Economists expected the ⁠Fed to raise rates in December. Fed chairman Kevin Warsh told reporters “economic activity is expanding at a strong pace”, noting that “while uncertainty remains, owing ‌in part to geopolitical developments, domestic spending has been resilient”.

Given the increasing dominance of AI-related spending, some economists said the strong GDP growth was ‌probably ‌not a true picture of the economy. Investors are increasingly focusing on the rising costs of long-term AI ‌projects in which the payoff is uncertain. Tech firms have borrowed huge sums over the past year for AI ⁠spending, a potential downside risk to equipment spending. Still, economists did expect this pillar of support to weaken, though ⁠a pullback in spending was likely.

Consumer spending, which accounts for more than two-thirds of the economy, increased at a 3.8 per cent pace in the July-September quarter after growing at a 3.8 per cent rate in ‌the second quarter. Historically low ‌lay-offs and moderate hiring are helping to underpin spending, though wage gains have at times lagged inflation.

But households also have been saving less and dipping into their nest eggs to fund spending. With average petrol prices still above US$4 a gallon as the US-Israeli war with Iran drags on, economists anticipated a slowdown in consumer spending.