U.S. Q3 GDP Growth Accelerates to 3.4% Amid Sticky Inflation
The U.S. economy expanded at a 3.4% annualized pace in the third quarter, exceeding forecasts, while September inflation data showed persistent price pressures, keeping the Federal Reserve on alert.
The U.S. economy grew at a 3.4% annualized rate in the third quarter, a significant acceleration from the 2.2% pace of the prior period. This performance, which beat economist expectations, was fueled by a powerful surge in private investment and steady consumer spending.
Third-quarter gross domestic product increased at a seasonally adjusted annualized pace of 3.4%. Gross private domestic investment soared by 19.4%, driven by a 20.9% surge in equipment spending and an 8.4% jump in intellectual property products. Consumer spending rose 3.8%, matching its second-quarter pace. A key gauge of underlying demand watched by Federal Reserve officials, real sales to private domestic purchasers, rose 4.9%.
Inflation remains sticky, core PCE unchanged
The personal consumption expenditures price index, the Fed's preferred inflation gauge, rose 0.5% in September from the prior month. That put the annual rate at 3.6%, up from 3.4% in August. The monthly increase was the largest since March.
Excluding volatile food and energy costs, the core PCE index rose 0.3% for the month and 3.1% from a year earlier. The annual core rate edged up from 3% in August. Price increases were broad-based in September.
| Category | Monthly Change | Annual Change |
|---|---|---|
| Headline PCE | 0.5% | 3.6% |
| Core PCE (ex. Food & energy) | 0.3% | 3.1% |
| Goods prices | - | 3.9% |
| Services prices | - | 3.5% |
Energy costs were a major driver, with gasoline and other energy goods seeing a 9.2% monthly rise. Services prices excluding energy and housing rose 0.4%, while housing costs increased 0.3%. On a quarterly basis, headline PCE prices rose 2.1%, down from 5% in the second quarter.
Labor market and consumer resilience
Supporting the growth figures, the labor market showed ongoing strength. Initial jobless claims edged lower to a seasonally adjusted 194,000 for the week ended October 24, near levels last seen in the late 1960s.
Consumer spending in September climbed 0.5%, slightly below forecasts, while personal income rose 0.2%. The personal savings rate dipped to 3.8% of disposable income in September, down from 4% in August and continuing a decline from a peak of 6.2% in April 2025.
Market reaction and Fed outlook
Financial markets reacted negatively to the strong growth and firm inflation data. Stock market futures turned lower following the releases, and Treasury yields fell. After markets opened, the benchmark S&P 500 Index declined more than 0.4%, the Dow Jones Industrial Average was down over 0.3%, and the Nasdaq Composite slid more than 1.4%.
Investors largely expect the Federal Reserve to respond with further policy tightening. The market is pricing in a 79.6% probability of a 25-basis-point interest rate hike at the central bank's December meeting. That would bring the federal funds rate target range to 4% to 4.25%. The data releases came just one day after the Fed voted to hold its benchmark rate steady in a range between 3.75% and 4%.
Fed Chairman Kevin Warsh noted that the period ahead is information rich, with a lot happening in the world, and that he and his colleagues are keen to take notice of it. Analysts observed that the seemingly indefatigable U.S. consumer and a nascent AI investment boom continue to drive the economy, with growth running well above trend. Another economist concluded that economic growth is powering ahead despite the uncertainty of geopolitical risks and the damage posed by higher energy costs.
The Bureau of Economic Analysis will release two subsequent revisions of the third-quarter GDP data. Federal Reserve policymakers, who focus on the PCE headline figure to bring inflation back to a 2% long-run target, are expected to continue monitoring incoming data closely, with markets firmly anticipating a rate increase in December.
