US economy grows 3.4% in third quarter as September PCE inflation heats up

What happened

America's economy expanded at a seasonally adjusted annual rate of 3.4% between July and September, according to the advance estimate from the Bureau of Economic Analysis (BEA). Economists had expected 3.1%, CNBC reported. The Financial Times (FT) reported that an investment boom tied to AI and steady household spending kept powering growth. Inflation data released the same day was less comforting. The personal consumption expenditures (PCE) price index, the Fed's preferred inflation gauge, rose 0.5% in September and 3.6% from a year earlier. Core PCE, which strips out food and energy, rose 0.3% on the month and 3.1% over the year.

What it means

Investment did much of the heavy lifting. CNBC said gross private domestic investment jumped 19.4% at an annual rate, with equipment spending up 20.9% and intellectual property products up 8.4%. The BEA said the equipment gain was led by information processing gear, mainly computers and peripherals, which fits the picture of companies pouring money into AI infrastructure. Private inventory building also added to growth, the agency said.

Households kept spending too. Consumer spending grew at a 3.8% pace, matching the second quarter, and government spending turned higher. One drag was exports, which fell, led by petroleum products, while imports rose. A measure Fed officials watch for underlying demand, real final sales to private domestic purchasers, increased 4.9% after 4.6% in the prior quarter. Strip out the swings in trade, inventories and government, in other words, and private demand still looks firm.

The inflation story is more complicated. Over the quarter as a whole, PCE prices rose at a 2.1% annual rate and core prices at 2.5%, a big slowdown from 5% and 3.3% in the second quarter, according to the BEA. But September alone was hot. CNBC said the monthly headline rise was the largest since March, driven largely by energy: gasoline and other energy goods climbed 9.2% in the month. Services prices outside energy and housing rose 0.4%, and housing costs rose 0.3%, a sign economists fear higher fuel costs could be spreading.

The timing matters for the Fed. The data arrived a day after policymakers held their benchmark rate in a 3.75% to 4% range. Fed Chair Kevin Warsh signaled officials want to study incoming numbers before acting. A strong economy and inflation stuck well above the 2% target make it harder to argue for cutting rates soon. Other figures pointed the same way: initial jobless claims fell to 194,000 in the week to October 24, below the 200,000 expected.

The bull case

Growth above 3% for the first time in a year, as one economist told CNBC, suggests the US economy is handling high energy costs and geopolitical uncertainty well. AI-related investment is turning into real output, consumers are still spending, and layoffs remain rare. Quarterly inflation also cooled sharply from the second quarter, and core prices in September matched forecasts, so the hot monthly reading may prove to be mostly an energy spike.

The bear case

Headline inflation at 3.6% is far above the Fed's 2% target, and September's jump was the biggest monthly gain since March. If energy costs keep feeding into services and housing, the Fed may keep rates higher for longer. Growth also leans heavily on AI spending and inventory building, which can be lumpy. Income rose only 0.2% in September, slower than spending, which could limit how long households keep up their pace.