US economy grows at 3.4% annual rate in third quarter as AI spending rises

In short: The US economy grew faster than expected in the third quarter, and big spending on AI infrastructure was one reason why.

What's going on

New government data shows the US economy expanded at a 3.4% annual rate in the third quarter. That was higher than the 3.2% rate many Wall Street analysts expected, and it was also faster than the 2.2% pace in the second quarter.

A key support for growth has been heavy investment by US companies in AI data centers and high-tech equipment. A data center is a building packed with computers that store and process information, like a giant server room for the internet. This kind of spending has been a steady theme this year.

Consumer spending also stayed strong, even with ongoing price pressures. One closely watched measure of private demand, called “real final sales to private domestic purchasers” (a way to track spending by households and businesses without some noisy items), rose 4.9% in the third quarter, up from 4.6%.

At the same time, inflation readings moved higher. The Personal Consumption Expenditures Index, the inflation gauge the Federal Reserve watches most closely, rose to a 3.6% annual rate in September, up from 3.4% previously.

Economists noted that trade reduced some of the growth number. Imports count as a negative in GDP because they are goods and services made outside the US, even if Americans buy them. One economist also pointed out that some AI-related equipment is imported, which can limit how much it boosts the GDP calculation.

What to watch

The big question is whether strong growth and higher inflation push the Federal Reserve to keep interest rates higher for longer. Investors will be watching upcoming inflation and consumer spending data for signs that demand is cooling or staying hot.

Source: Financial Times