The US economy grew 3.4%, its fastest in a year. Look at what's inside

What happened

The US economy grew at an annual rate of 3.4% in July–September, up from 2.2% in the spring and above economists' forecasts, according to the first estimate from the Bureau of Economic Analysis on 29 October. It was the fastest pace in a year.

Business investment rose at a 12.7% annual rate, the most since 2020 according to Bloomberg, with spending on equipment, much of it for artificial intelligence, contributing more to growth than at any time since 2011 outside the pandemic rebound. Household spending rose 3.8%, for a second quarter in a row.

Separate figures showed the Fed's preferred inflation measure, the PCE price index, rose 0.5% in September alone and 3.6% on a year earlier. Excluding food and energy, it rose 0.3% on the month.

Why imports pulled growth down

GDP measures what is produced in the country. When a US company buys servers made in Taiwan, the purchase counts as investment, but the import is subtracted again. In the third quarter imports jumped and net exports took 3.3 percentage points off growth, the most since early last year. Much of that was equipment for data centres.

Inventories worked the other way: goods bought but not yet sold count as production, and stockbuilding added 1.6 points. Strip out both, and a steadier measure, spending by households and businesses at home, rose 4.9%.

Why consumers are a weaker pillar than they look

Households kept spending, but their real income after tax fell in September and the saving rate dropped to 3.8%, the lowest since the end of 2022, Bloomberg reported. Spending that grows faster than income is paid for out of savings, and that cannot last forever. Much of the spending comes from better-off households whose wealth has risen with share prices.

Where it sits in the chain

This is Link 5, the real economy, feeding back into Link 3. Strong growth and inflation of 3.6% leave the Fed little reason to stop raising rates: markets still expect a rise in December. And the AI share of growth shows how much now rides on technology spending (see our explainer on how much US growth depends on AI).

What to watch

• Revisions: this is a first estimate, revised twice in the coming months.
• October jobs and inflation data, before the Fed's December meeting.
• Whether big technology firms keep raising investment after Alphabet's results.