U.S. Q3 GDP Surprises at 3.4%... September PCE Inflation Rises to 3.6%

GDP growth rises from 2.2% to 3.4%
Surge in AI investment and strong consumer spending drive growth
Oil prices are the main driver of September PCE increase
84% chance of another Fed rate hike in December

The U.S. economy grew at its fastest pace in a year in the third quarter, beating market expectations. The growth was driven by a surge in corporate investment related to artificial intelligence (AI) and resilient consumer spending despite high inflation. The day before, the Federal Reserve (Fed) also upgraded its assessment of the U.S. economy in a statement, changing its description from “solid” to “strong.”

A worker stocks shelves at a supermarket in New York. New York, U.S. = Correspondent Hwang Yoonjoo

However, with energy prices surging and inflation accelerating again, markets are increasingly betting that the Fed will raise interest rates again before the end of the year.

The U.S. Department of Commerce said on October 29 local time that the advance estimate of gross domestic product (GDP) growth for the third quarter was 3.4% on an annualized basis from the previous quarter. That was above the market forecast of 3.2%, compiled by Bloomberg, and 1.2 percentage points higher than the 2.2% growth recorded in the second quarter.

AI investment and consumer spending drove U.S. economic growth. Private fixed investment rose 9.4% on an annualized basis in the third quarter, its highest growth rate since the COVID-19 pandemic in 2020. The increase came as major technology companies poured vast sums into building AI data centers and securing advanced equipment.

Consumer spending remained resilient despite high inflation. Personal consumption expenditures (PCE) rose 3.8% in the third quarter on an annualized basis from the previous quarter. PCE measures how much U.S. consumers spend on goods and services. It is distinct from the PCE price index, which measures how much the prices of goods and services purchased by consumers have risen.

James McCann, senior economist at Edward Jones, told the Financial Times (FT) that “the U.S. economy continues to be driven by tireless American consumers and an AI investment boom that is only just getting started,” adding that “economic growth is running well above its long-term trend.”

September PCE rises 3.6% as oil prices surge... Fed could tighten further

A supermarket in Manhattan, New York. New York, U.S. = Correspondent Hwang Yunju

Inflationary pressures are also mounting.

The U.S. Department of Commerce said that the PCE price index rose 3.6% in September from a year earlier. The increase was slightly below economists’ forecast compiled by Dow Jones but 0.2 percentage points higher than August’s 3.4% rise.

On a monthly basis, the index rose 0.5%, in line with expectations. That was a sharp acceleration from August’s 0.3% increase and the largest monthly rise in six months.

The core PCE price index, which excludes food and energy prices, rose 3.1% year over year and 0.3% month over month, in line with expectations.

Soaring energy prices pushed up the overall index. Goods prices rose 0.8% month over month in September, led by a 9.2% surge in gasoline and other energy goods prices. Energy prices, which have soared amid the war with Iran, are adding to inflationary pressures.

Service prices also rose 0.3% month over month. Service prices and housing costs are among the indicators the Fed closely monitors when assessing inflation. Service prices tend to be more affected by wages and labor costs than goods prices. Because wages rarely fall once they rise, inflation could persist for an extended period.

Diane Swonk, chief U.S. economist at KPMG, told the FT that “the economy is remarkably resilient, but it doesn’t feel that way to many people,” because “the reality individuals experience in their daily lives differs from average economic indicators.” She added that “the cumulative pain of inflation is real, and prices remain too high for many people.”

Jim Bianco, president of Bianco Research, told the FT that inflation figures were more noteworthy than GDP growth, saying, “The inflation data came in hotter than expected.” He went on to ask, “Why didn’t the Fed raise rates again?”

Meanwhile, as of this writing, interest rate futures markets were pricing in an 84.6% probability that the Fed would raise its benchmark interest rate in December, according to CME FedWatch.

This content was produced with the assistance of AI translation services.