U.S. economy grows 3.4% in Q3 as September inflation hits 3.6%

The Federal Reserve maintained its benchmark interest rate at 3.75% to 4.00% on Wednesday, a decision made just before new economic data revealed a sharp acceleration in price growth. Thursday's reports from the Commerce Department indicated that the U.S. economy is expanding at a pace that outstrips current forecasts, even as inflation remains well above the central bank's 2% target.

Gross domestic product increased at a seasonally adjusted annualized rate of 3.4% in the third quarter. This figure exceeded the 3.1% estimate and marked a substantial increase from the 2.2% growth rate recorded in the second quarter. The strong performance followed a period of uncertainty regarding the economic outlook under the current administration.

Inflation metrics showed that the personal consumption expenditures price index rose 0.5% in September. This monthly increase was the largest since March and matched the Dow Jones consensus forecast. The annual inflation rate stood at 3.6%, which was 0.1 percentage point lower than expected. Core PCE, which excludes volatile food and energy categories, rose 0.3% for the month and 3.1% on an annual basis.

Consumer behavior in September reflected resilience in the market. Personal consumption expenditures climbed 0.5%, slightly below the 0.6% forecast, while personal income increased by 0.2%. These figures suggest that household spending power remains stable despite higher costs for essential goods.

The Labor Department reported that initial jobless claims for the week ending Oct. 24 fell to 194,000. This number was lower than the 200,000 estimate and aligns with levels last seen in the late 1960s. The low claim rate indicates that employers are not laying off workers at a high rate, supporting the overall picture of a tight labor market.

Energy costs were the primary driver of the September price surge. Gasoline and other energy goods increased by 9.2% for the month, while the broader category of energy goods and services jumped 5.4%. Economists noted that this spike in energy prices could spread to other sectors of the economy if it persists.

Investment in the artificial intelligence build-out contributed to the strong GDP growth. Gross private domestic investment rose 19.4% in the third quarter, driven by a 20.9% surge in equipment spending and an 8.4% increase in intellectual property products. Real sales to private domestic purchasers, a measure used by Fed officials to gauge underlying demand, increased by 4.9%, up from 4.6% in the prior quarter.

Kevin Warsh, the Federal Reserve chairman, stated that the current period is information-rich and that he and his colleagues are keen to observe incoming data. He emphasized the need to evaluate the world's events before deciding on the next monetary policy move. Despite the strong growth data, central bank officials maintain that they can afford to wait before adjusting interest rates.

Market reactions to the data were mixed. Stock market futures fell following the releases, and Treasury yields also decreased. Chris Rupkey, chief economist at Fwdbonds, noted that real GDP has returned to a 3% run rate for the first time in a year. He attributed this recovery to high levels of consumer and government spending, as well as increased investment in technology infrastructure.

On a quarterly basis, PCE prices rose 2.1% in the third quarter, down from 5.0% in the second quarter. Core PCE prices increased by 2.5%, a decrease from 3.3% in the prior period. This quarterly moderation offers some relief from the monthly acceleration seen in September, but the annual figures remain elevated. Housing costs increased by 0.3% in September, while services prices excluding energy and housing rose by 0.4%.