US Growth Jumps to 3.4% Rate as AI Spending and Inflation Lift Economy

The U.S. economy grew at a 3.4% annual rate from July through September, the Commerce Department said Thursday, up from a 2.2% pace in the prior quarter. Nonresidential investment rose 12.7% over the three-month period, and business equipment spending climbed at a 20.9% annual rate as companies built computing facilities for artificial intelligence.

Spending by Alphabet, Microsoft and Meta on new data centers has powered much of that equipment growth. Consumer spending increased 3.8%, led by purchases of health care and restaurant meals. Government spending added nearly a percentage point to growth. Sales to domestic purchasers, adjusted for inflation, rose 4.9%, the fastest pace in more than five years.

Prices remain a problem. The personal consumption expenditures index was 3.6% higher in September than a year earlier, and the measure excluding food and energy costs rose 3.1%, up from 3% in August. Inflation has run above the Federal Reserve's 2% target for nearly six years. The personal savings rate fell to 3.8% in September, down by nearly half since the start of 2024, and inflation-adjusted personal income dropped to its lowest level since May.

"The economy's very strong, and it has an inflation problem," said Michael Strain of the American Enterprise Institute. "I don't think those two characteristics are unrelated." Federal Reserve Chair Kevin Warsh said Wednesday that economic growth has strengthened and called inflation "elevated." The Fed left its benchmark rate unchanged at that meeting. White House spokesman Matthew Middleton said President Donald Trump's tax cuts and deregulation are driving the expansion.

The trade deficit reached nearly $135 billion in September, the highest in 18 months, the Census Bureau said Wednesday, as businesses imported equipment for data centers. A Washington Post-ABC News-Ipsos poll this month found Democrats lead Republicans 37% to 28% on which party handles the economy. Investors expect the Fed to raise rates a quarter point in early December. Government statisticians will revise Thursday's GDP estimate at least twice as more data arrives.