The US economy grew at a seasonally adjusted annualized rate of 3.4% in the third quarter, according to Commerce Department reports Thursday, beating the 3.1% forecast and marking a sharp acceleration from the 2.2% expansion in the second quarter. At the same time, price pressures intensified, with the personal consumption expenditures price index rising 0.5% in September on a seasonally adjusted basis, the largest monthly increase since March. The annual inflation rate reached 3.6%, keeping prices well above the Federal Reserve's 2% target, though the reading was 0.1 percentage point below consensus expectations.
Core PCE, which excludes volatile food and energy costs and is watched closely by the Fed as a guide to longer-term inflation trends, rose 0.3% for the month and 3.1% annually, in line with forecasts. The Commerce Department also reported that consumer spending climbed 0.5% in September, slightly below the 0.6% forecast, while personal income rose 0.2% against an estimate for 0.3% growth. On a quarterly basis, headline PCE prices increased 2.1% and core PCE rose 2.5%, both down significantly from the second quarter's 5% and 3.3% readings respectively.
Economic expansion has been driven by robust investment and spending. Consumer spending advanced 3.8% in the third quarter, matching the prior period's pace. Gross private domestic investment surged 19.4%, fuelled by equipment spending that jumped 20.9% and intellectual property investments that rose 8.4%. Real sales to private domestic purchasers, a metric Fed officials use to gauge underlying demand, increased 4.9%, up from 4.6% in the second quarter. The Labour Department reported that initial jobless claims edged lower to a seasonally adjusted 194,000 for the week ended October 24, below the 200,000 estimate.
However, energy costs pose a significant risk. Gasoline and other energy goods surged 9.2% in September, while energy goods and services broadly jumped 5.4%. Economists worry this spike could spread to other parts of the economy. Services prices excluding energy and housing rose 0.4%, and housing costs increased 0.3%. The Federal Reserve voted Wednesday to hold its benchmark interest rate in a range between 3.75% and 4%, with Chairman Kevin Warsh stating the central bank plans to monitor incoming data before deciding on future moves.
For American savers and borrowers, the persistent gap between inflation and interest rates means purchasing power continues to erode, while the strong economic growth may eventually pressure the Fed to raise rates again. Stock market futures turned negative following Thursday's releases, while Treasury yields fell.