The US economy grew at a 3.4% annual rate in the third quarter, faster than forecast, as businesses poured money into artificial-intelligence equipment and consumers kept spending. The details are less robust than the headline: almost half the growth came from companies rebuilding inventories, much of the AI hardware was imported, and in September household spending stalled once inflation is taken out. With inflation at 3.6% on the Fed’s preferred measure, the report strengthens the case for a December rate hike.
Key figures
- Real GDP, third quarter: +3.4% annual rate (second quarter: +2.2%; forecasts about 3%)
- Consumer spending: +3.8%; business investment: +12.7%; housing investment: −3.3%
- Growth excluding inventories (final sales of domestic product): +1.7%
- PCE inflation, September: 3.6% (core 3.1%); CPI inflation: 3.7%
- Personal saving rate, September: 3.8% of after-tax income, down from 4.0% in August
- Fed funds target range: 3.75%–4.00%, held on 28 October in a 10–2 vote; futures put the chance of a hike on 9 December above 70%
- Brent crude: $112.28 at Friday’s weekly close, after a six-month high of $116.72 on 23 October
GDP figures are the Bureau of Economic Analysis’s first (“advance”) estimate, published 29 October 2026; the second estimate is due on 25 November.
I. The AI investment boom
The economy grew at a 3.4% annual pace from July to September, up from 2.2% in the second quarter and above the roughly 3% economists expected. It was the fastest growth since the third quarter of 2025.
Business investment, excluding housing, rose at a 12.7% annual rate, driven by spending on AI. Investment in information-processing equipment, mainly computers and servers for data centres, jumped 37.4%. Software rose 9.6% and research and development 7.5%.
The spending is set to keep growing. Goldman Sachs estimates that five companies, Amazon, Alphabet, Microsoft, Oracle and Meta, will spend about $800 billion on AI infrastructure this year and about $1.2 trillion in 2027. By the bank’s estimate, they would need roughly $300 billion a year in AI revenue to justify that outlay, which is the question behind this month’s tech-stock selloff.
Tax rules help. The 2025 tax law restored 100% “bonus depreciation”, letting companies deduct the full cost of equipment in the year they buy it, backdated to January 2025 and made permanent. That pulls the tax benefit of a data-centre build forward but does not expire. The risk runs the other way: in July, Senator Mark Warner proposed denying full expensing for AI data centres. If proposals like that gain ground, companies have a reason to lock in spending sooner.
II. Read the fine print: inventories and imports
Two items flatter or distort the headline, and they partly cancel out:
- Inventories. After five quarters of running down stocks, companies rebuilt them, adding 1.61 percentage points to growth, nearly half the total. Without inventories, the economy grew at just 1.7%, below the roughly 2% economists expected. Inventory swings tend to reverse.
- Imports. Imports surged at a 19.7% annual rate, mostly capital goods such as computers. Because GDP measures what is produced in the US, imports are subtracted, and with exports also falling, trade cut 3.32 points from growth. In other words, much of the AI hardware boosting investment was made abroad.
The measure many economists prefer for underlying demand, final sales to private domestic buyers, which strips out inventories, trade and government, grew a solid 4.9%. Government added 0.9 points, partly because of an accounting effect from lower sales of oil from the Strategic Petroleum Reserve.
III. A two-speed consumer
Consumer spending grew at a 3.8% rate, the same as in the second quarter, and contributed about 2.5 points of growth. But the monthly data show it fading by the end of the quarter. In September, spending rose 0.5% in dollars but was flat after inflation, and real disposable income fell 0.3%. Spending on gasoline and other energy goods rose $45.7 billion, about 40% of the month’s increase, though people were not driving much more. Higher prices, not more purchases, did much of the work.
To keep spending, households are saving less. The personal saving rate fell to 3.8% in September, from 4.0% in August and 5.6% in January, its lowest since October 2022. Spending is also concentrated among higher-income households, whose stock portfolios have done well; the Center for Economic and Policy Research has argued that stock-market wealth is driving consumption. That makes spending vulnerable to the kind of stock-market fall seen in October, when the Nasdaq lost about 5%.
Borrowing is high too. Household debt stood at $18.8 trillion in the second quarter, according to the New York Fed, and credit-card balances at a record $1.26 trillion. About 7% of card balances were moving into serious delinquency, roughly unchanged from a year earlier, though the share of all household debt in delinquency eased slightly to 4.7%. The third-quarter figures are due in early November.
Housing is the clear weak spot. Residential investment fell at a 3.3% rate, its sixth decline in seven quarters, as mortgage rates stay high.
IV. Inflation and the Fed
Strong growth would be welcome news if inflation were under control. It is not. The PCE price index, the Fed’s preferred gauge, rose 3.6% in the year to September, up from 3.4% in August; core PCE, which excludes food and energy, rose 3.1%. Consumer prices rose 3.7%, with gasoline up 9.1% in September alone. Over the third quarter as a whole, inflation slowed after a spring energy shock, but September’s figures show it picking up again, and Capital Economics noted that prices for core services excluding housing rose nearly 0.4% in the month, a sign the pressure is spreading beyond fuel.
The Federal Reserve held its target range at 3.75%–4.00% on 28 October, a month after its first hike in more than three years. Two of the twelve voters, Governor Lisa Cook and Cleveland Fed President Beth Hammack, wanted another quarter-point increase. Chair Kevin Warsh gave no guidance on December, but the data released the next day pointed one way. Joe Brusuelas of RSM cited strong spending, low jobless claims and booming business investment as reasons for a December hike, and Chris Osmond of Fifth Third Wealth Advisors said the hold “looks like a pause rather than the end of the tightening cycle,” according to coverage of the report. Futures put the chance of a hike on 9 December above 70%.
The Fed’s dilemma is that the forces pushing inflation up are partly outside its reach. Oil reflects the conflict with Iran: Brent reached $116.72 a barrel on 23 October on reports of a possible renewed US strike after the 3 November midterms, and closed the week at $112.28. Raising rates does not lower the oil price; it slows the rest of the economy, starting with housing, which is already shrinking.
V. What it means for markets
Stock-market earnings depend heavily on the same few companies driving the investment boom. Before the third-quarter reporting season, Goldman Sachs strategist Ben Snider estimated that just ten stocks, about 2% of the S&P 500, would deliver 68% of the index’s earnings growth, with Nvidia and Micron alone providing about a third. That concentration is why doubts about the payoff from AI spending hit the whole market in October, and why some analysts argue valuations are stretched.
For gold and silver, the strong data mattered mainly through interest rates. Higher odds of a December hike helped push gold to a one-year low near $3,880 on Friday and silver below $50. Gold’s response to past Fed decisions is on the gold after Fed holds page.
The mix of strong but uneven growth, sticky inflation, an energy shock and concentrated stock markets is one investors usually meet by spreading risk rather than betting on one outcome. Treasuries have tended to do well when stocks correct and the economy slows; gold has tended to do well when real interest rates are low or falling, which is not the case today; and commodities have offered protection when geopolitical shocks push prices up. Each works in a different scenario, and none works in all of them.
The next tests come quickly: the midterm elections on 3 November, the October jobs report on 6 November, the second GDP estimate on 25 November and the Fed’s decision on 9 December. The dates are on the economic calendar.
Figures come from the Bureau of Economic Analysis, the Bureau of Labor Statistics, the New York Fed, the Corgano price sites and the sources linked above. This article is commentary on economic and market conditions; it is not investment, tax or financial advice.
