U.S. GDP Grows 3.4% in Third Quarter as Consumer Spending and Investment Strengthen

U.S. economic growth accelerated in the third quarter, with real gross domestic product rising at a 3.4% annualized rate, according to the advance estimate the Bureau of Economic Analysis released on Oct. 29. That was up from 2.2% in the second quarter and modestly above economists’ expectations, which were generally around 3.0% to 3.2%, including a Reuters median of about 3.2%.

The report pointed to solid domestic demand even as trade weighed on the headline figure. BEA said the increase in GDP reflected gains in investment, consumer spending and government spending, partly offset by a decrease in exports, while imports increased. A key measure of underlying demand in the private sector — real final sales to private domestic purchasers, which strips out trade, inventories and government — rose 4.9% in the quarter.

Consumer spending, the economy’s main engine, increased at a 3.8% annualized rate, with services a leading source of strength. Business investment also helped drive growth. BEA said, “The increase in investment primarily reflected increases in private inventory investment and in equipment.” Within equipment, the agency highlighted information-processing equipment, including computers and peripherals, as a leading contributor.

The composition of growth also came with important caveats. Exports fell and imports rose, a combination that subtracts from GDP in the national accounts. Government spending added to growth, but BEA said the upturn was more than accounted for by federal government spending, led by nondefense consumption expenditures, and that “The pattern of nondefense spending primarily reflected sales of crude oil from the Strategic Petroleum Reserve…” That makes part of the government contribution more of an accounting effect than a straightforward sign of broad-based public-sector demand.

Inflation measures embedded in the GDP report were cooler than in the second quarter. The gross domestic purchases price index rose at a 3.0% annualized rate in the third quarter. The personal consumption expenditures price index — the Federal Reserve’s preferred inflation gauge — increased at a 2.1% rate, while core PCE, which excludes food and energy, rose at a 2.5% rate.

Still, a separate BEA report on personal income and outlays released the same day showed price pressures had not disappeared by the end of the quarter. In September, headline PCE prices rose 0.5% from the prior month and 3.6% from a year earlier. Core PCE increased 0.3% on the month and 3.1% year over year.

The GDP figures are the BEA’s first look at third-quarter activity and are often revised as more complete data become available. The agency is scheduled to publish its second estimate on Nov. 25 and its third estimate on Dec. 23.

The report arrived one day after the Federal Reserve left its benchmark interest rate unchanged at 3.75% to 4.00%, with inflation still central to the policy outlook.