US GDP Grew 3.4% in Q3, Beating Forecasts Days Before Midterms

The US economy grew at a 3.4% annualized rate in the third quarter, beating the 3.2% pace economists polled by Reuters had forecast. The Commerce Department's Bureau of Economic Analysis published the advance estimate on Thursday, less than a week before Tuesday's midterm elections that will determine control of Congress.

Forecasters' estimates had ranged widely — from 1% growth to 4.2% — so the actual print landed near the optimistic end of the spectrum. For practitioners, the number matters because it confirms expansion well above what some Federal Reserve officials regard as the non-inflationary growth rate of roughly 2%.

What drove the beat?

Two pillars carried the quarter. Resilient consumer spending, which accounts for more than two-thirds of the economy, increased at a 3.8% pace in the July-September period — matching the 3.8% rate posted in the second quarter. On top of that, AI-driven business investment more than offset the drag from higher oil prices stemming from the conflict in the Middle East.

The labor picture underpins that spending. Historically low layoffs and moderate hiring are keeping households in the game, though wage gains have at times lagged inflation.

The Fed's read

The US central bank on Wednesday left its benchmark interest rate in the 3.75%-4% 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." Keep those quotes in mind — they signal a central bank that sees strength but isn't dismissing the risks from abroad.

Is the GDP number telling the full story?

Here's where it gets more complicated for anyone reading the headline at face value. Given the increasing dominance of AI-related spending, some economists said the strong GDP growth was probably not a true picture of the economy. The concern is specific: investors are increasingly focused 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 to fund AI spending, which economists flag as a potential downside risk to equipment spending. Still, they did expect this pillar of support to weaken — and a pullback in spending was likely, though not necessarily imminent.

What does this change for businesses planning into next year? A 3.4% growth economy with rates at 3.75%-4% and a possible December hike means the cost of capital stays the binding constraint, especially for the very tech firms fueling the AI investment surge.

The consumer paradox

The growth figures sit in stark contrast to households' downbeat assessment of the economy, reflected in Donald Trump's record-low approval ratings and a sharp deterioration in consumer sentiment. Hard data and soft data are telling opposite stories.

There's also a sustainability question. Households have been saving less and dipping into their nest eggs to fund spending — you can't draw down savings indefinitely. And with average gasoline prices still above $4 a gallon as the US-Israel war on Iran drags on, economists anticipated a slowdown in consumer spending.

The political timing sharpens the stakes. A strong GDP print landing days before voters decide control of Congress gives both parties exactly the number they want to argue about — one side citing growth above 3%, the other citing sentiment and prices at the pump.

For markets and business planners, the forward path is fairly clear from the source material: solid growth now, a probable December rate hike, an AI investment pillar expected to weaken over time, and a consumer running partly on savings just as fuel costs stay elevated.