Strong growth and inflation paints mixed picture of economy days before midterm elections
WASHINGTON (AP) — U.S. economic growth was notably strong from July to September, yet inflation accelerated at the same time, new data showed Thursday, painting a mixed picture about the country's economy less than a week before midterm elections in which the uncomfortably high cost of living looms larger than perhaps any other issue.
Strong consumer spending and soaring investment in artificial intelligence infrastructure were key drivers of growth in the third quarter. When unemployment is as low as it is right now, consumers often spend at a healthy clip and they are doing so, particularly wealthier Americans who are riding a wave of record stock market gains.
The economy grew at a strong 3.4% annual rate in the July-September quarter, the Commerce Department said Thursday, much faster than the 2.2% growth in the April-June quarter.
Consumer spending climbed 3.8% at an annual rate, marking the second straight quarter of strong growth and far exceeding the 0.7% increase in the first three months of the year. Business investment, driven by spending on AI infrastructure, jumped 12.7%, the most in six years.
Yet economists worry that persistently high prices are eroding Americans' ability to keep up. Thursday's data suggest consumers are increasingly dipping into savings to cover their costs. After-tax incomes, adjusted for inflation, slipped from August to September and were up just 1% from a year earlier. At the same time, inflation-adjusted spending rose 2.5% from a year earlier.
As Americans splurged, the savings rate fell to 3.8% in September, its lowest level in four years, data published Thursday showed.
“High energy prices are chipping away at purchasing power,” Ksenia Bushmeneva, an economist at TD, a bank, wrote. “Real income failed to grow for a second consecutive month, while the saving rate continued to decline. Together with higher borrowing costs, these headwinds are likely to weigh on consumer demand in the coming quarters.”
Consumer prices rose 3.6% in September from a year earlier, the Commerce Department said Thursday, up from 3.4% in August. On a monthly basis, prices climbed 0.5%, up from 0.3% in August and the highest figure since May.
Rising gas prices drove much of the inflation increase as renewed violence in the Middle East kept oil prices above $100 a barrel, up from below $70 before the Iran war. But prices also rose outside of the energy sector. The cost of services such as shipping, hotel rooms, and utilities increased rapidly from August to September, a sign that inflation is spreading and growing more entrenched.
The average price of a gallon of gas in the U.S. was $4.23 on Thursday, 39% more than it cost a year ago. Diesel prices have risen much faster. While most consumers don't buy diesel, it has an outsized impact on inflation because it is used in industrial sectors and shipping.
“The inflation outlook has become more concerning," Bushmeneva said. “Price pressures are showing signs of heating up. Elevated gasoline prices are keeping headline inflation hot, but underlying pressures are also broadening.”
Polls show that rising inflation has soured most voters on the economy, leading them to give President Donald Trump poor marks for his handling of rising prices. Trump campaigned in 2024 on lowering the cost of living, including bringing the cost of gas below $2 a gallon.
Excluding the volatile energy and food categories, core inflation also picked up last month. It increased 3.1% from a year ago in September, up from 3% in August, the Commerce Department said. From August to September, core prices rose 0.3%, the same as the previous month.
The new economic growth and inflation numbers arrive a day after the Federal Reserve, the agency tasked with combating inflation, left its key interest rate unchanged. Yet strong economic growth and persistently higher prices could mean more pain for Americans when the Fed meets in December. The Fed is now much more likely to raise its key interest rate, which could lift borrowing costs across the economy.
Strong growth also suggests that the Fed's key interest rate, currently 3.9%, isn't high enough to cool borrowing, spending, or inflation.
"If the Federal Reserve is looking for more information on why they should act to restore price stability they can find it inside a slate of robust spending, historically low jobless claims, stratospheric private non-residential investment, and sizzling inflation data," Joe Brusuelas, chief economist at RSM, a tax advisory firm, wrote.
Thursday's inflation data come from the personal consumption expenditures price index, which typically echoes the better-known consumer price index published earlier this month. The Fed more closely monitors the PCE index because it puts less weight on housing prices and allows for changes in consumers' shopping habits.
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