GDP Grew 3.4%, but Inventories Supplied Nearly Half the Gain

The U.S. economy grew at a 3.4% annualized pace in the third quarter, the Bureau of Economic Analysis said Thursday, beating both the prior quarter's 2.2% and the 3.2% median forecast. Consumer spending rose 3.8%, and Goldman Sachs economists called the makeup of the quarter "strong." That headline, however, hides an economy splitting in two: an AI investment boom and a housing market one strategist calls haunted.

Where the 3.4% actually came from

Much of the growth came from a few concentrated places, and some of it had slowed by the time the quarter ended. Spending on information-processing equipment — the computers and peripherals feeding the AI buildout — jumped 37.4%, while industrial equipment surged 24.7%, according to BEA data broken out by Goldman. Housing investment fell 3.3%.

Inventories, which companies build up and then sell down, added 1.6 percentage points to the headline GDP gain — nearly half of it. In September, the final month of the quarter, real consumer spending was flat, according to the personal consumption and expenditures report. Goldman expects spending to slow from here as the boost from fiscal stimulus earlier in the year "fades completely," and it already tracks fourth-quarter growth at just 1.8%.

The headline, in short, rests heavily on stockpiling and machines.

Why is the housing market 'haunted'?

David Kelly, chief global strategist at J.P. Morgan Asset Management, opened his weekly note this week by declaring "the housing market is haunted." The National Association of Home Builders' gauge of buyer traffic fell to 18 in early October, its lowest in almost 15 years, Kelly wrote. He estimates 2026 housing starts at 1.32 million units, the weakest since 2019.

The homeownership rate has slipped to 65.2% from 66.0% in 2022, "with a much sharper recent decline for those under age 35." Goldman expects housing investment to fall 5.0% annualized in the fourth quarter even as business investment, driven by AI, rises 8.2%.

Kelly sees "a silver lining" for markets: weak housing restrains growth and inflation "in the face of the AI boom." For everyone else, he wrote, it is "only a silver lining in a generally gloomy sky," with young people's plans to "marry, settle down and build a family in their own home" pushed back.

What the headline understates

BEA's numbers cut the other way, too. Real final sales to private domestic purchasers — which strips out inventories, trade and government to show what American consumers and businesses actually bought — rose 4.9%, faster than the headline and up from 4.6% in the second quarter. Net trade subtracted 3.3 percentage points on stronger imports and lower exports, so the headline also hides some genuine domestic demand. Some of those imports are the AI equipment itself; BEA built its information-processing estimate mainly from import data.

The labor market is holding up. The four-week average of initial jobless claims fell to 197,000, the lowest since 1969, Goldman noted. Core PCE inflation ran 3.12% year over year in September, though Goldman's estimate of the Dallas Fed's trimmed-mean measure, which it treats as a better read on the underlying trend, was 2.27%.

The Fed held rates steady this week, and Goldman still expects it to raise them another quarter point in December.

Kelly pushed back on the claim that mortgage rates alone explain the slump. "That being said, it should be noted that the current rate on a 30-year fixed rate mortgage, at 7.32% last week, is not particularly high by historical standards," he wrote. "It has actually averaged 7.68% over the past 50 years and 7.60% in the 20 years before the Great Financial Crisis."

In other words, rates near multi-decade norms — roughly 7.7% across half a century — are not, by themselves, the anomaly.

Is the AI boost already peaking?

Goldman's global economists think the lift from AI is already easing. "We are passing the peak impulse from the AI boom," they wrote Thursday, and they expect AI investment as a share of U.S. GDP to shrink in the coming quarters, along with the boost to consumer spending from rising asset prices.

Do not expect housing to fill the gap. Residential construction ran at $1.182 trillion in the second quarter, or 3.6% of nominal GDP, according to Kelly. He expects housing starts to fall again, to 1.24 million in 2027, and "lower still in 2028."

With the AI impulse fading, stimulus gone by the fourth quarter and housing in a multi-year slide, the 3.4% print may mark the top of this cycle's growth rather than its middle.