The U.S. economy surged in Q3, with GDP expanding at a 3.4% annualized rate, beating forecasts and marking a clear pickup from the prior quarter. Growth is broad‑based, not limited to the AI boom.
Business investment, robust consumer spending on durable and nondurable goods, strong inventory accumulation and higher federal outlays drove the gain.
Analysts expect Q4 growth to stay above 2%, sustained by the same factors.
Initial jobless claims dropped to 194,000 for the week ending Oct. 24, well below the 200,000 threshold and near the lowest level in 57 years, the Labor Department reported.
Continuing claims fell to 1.7 million, the lowest in more than three years.
Jamie Cox, managing partner at Harris Financial Group, said the economy is on fire and that some conflate inflation with growth.
The Next Chapter in Inflation
September’s PCE price index rose to 3.6% year‑over‑year, with core PCE climbing to 3.1%, as higher energy prices from the Iran war pushed inflation higher.
Crude oil remains above $100 a barrel, with Brent edging toward $120, keeping gasoline prices near $4.23 per gallon, down more than 20 cents from a month earlier.
Consumer confidence rebounded to a four‑month high, though many plan to curb spending on durable goods over the next six months.
Fergus McCormick of The Conference Board noted that higher price levels and persistent inflation eroded purchasing power.
Real hourly earnings fell 0.7% year‑over‑year through September 2026, pushing real incomes down and the saving rate to a multiyear low, Bill Adams of Fifth Third Commercial Bank said.
Treasury officials project core PCE to ease to 2% by 2027 as energy prices stabilize, with headline inflation potentially slipping to around 1%.
The Cleveland Fed’s Nowcasting Model expects CPI to stay at 3.7% annually and core inflation to drop to 2.5%, while PCE forecasts see a rise to 3.8% and 3.2%.
The Fed’s Playbook
September’s Summary of Economic Projections shows policymakers anticipate headline PCE of 2.3% and core PCE of 2.5% in 2027.
Fed Chair Kevin Warsh reiterated the 2% inflation target, and traders price a quarter‑point rate hike for December.
Larry Holzenthaler of Catalyst Funds warned that inflation remains above target and GDP growth is acceptable, suggesting further rate increases are likely.
Economists caution that aggressive tightening amid a supply shock could jeopardize growth and strain credit for businesses, consumers and investors.
James Thorne, chief market strategist at Wellington Altus, posted on X that evidence for aggressive tightening is weak, saying the oil shock appears temporary.
