Economist: Strong GDP growth, inflation complicate Fed's decisions

The Bureau of Economic Analysis released its advance estimate for third-quarter GDP Thursday, reporting an annualized increase in real GDP of 3.4%.

Annual inflation, as measured by the Personal Consumption Expenditures Price Index, increased to 3.6% in September from 3.4% in August, remaining well above the Federal Reserve's 2% target.

Investment increased in the third quarter, led by inventory and equipment purchases, particularly computers and related technology. Business investment in equipment rose 20.9% at an annualized rate, while investment in intellectual property products also increased.

Consumer spending grew at an annualized rate of 3.8%, matching the second quarter's pace, reflecting increases in both goods and services, including health care, food services and prescription drugs.

Although consumer spending continued to support economic growth, the acceleration from the second quarter was driven largely by stronger investment and a rebound in government spending, according to the BEA. The increase in government spending partly reflected fewer sales of oil from the Strategic Petroleum Reserve. Because those sales are subtracted from government spending when calculating GDP, fewer sales resulted in a higher spending figure.

Imports, which count against GDP growth, increased for the third consecutive quarter in 2026, after declining through much of 2025. Exports, which contribute to GDP growth when they increase, declined in the third quarter after rising during the first half of the year.

“The headline growth number is impressive, but the underlying strength is more significant,” Earle said.

Earle pointed to both overall GDP growth and real final sales to private domestic purchasers, a measure of consumer spending and private fixed investment that excludes government spending, trade and inventory changes. The latter rose 4.9% in the third quarter, which Earle said “strongly suggest[s] genuine underlying economic momentum” rather than growth driven by more volatile components of the economy. He also noted continued growth in consumer spending.

While Earle emphasized that artificial intelligence is playing a major role in economic growth, he cautioned that spending on AI does not necessarily translate into equivalent economic returns and that much of the equipment used is imported, meaning not all of that spending contributes to U.S. economic output.

“It's important, especially watching growing concerns in stock and debt markets, to note that the economic benefits of technological innovation and the financial returns earned by its initial investors are two different matters with different implications,” Earle said.

Ryan Young, a senior economist at the Competitive Enterprise Institute, also sounded a cautionary note about AI.

“A lot of that growth is concentrated in AI. Much of the rest of the economy is growing more slowly than average. If there is an AI bubble and it pops, there could easily be a recession,” Young told The Center Square.

And while consumer spending continued to support economic growth, Young underscored that inflation has eroded consumers' purchasing power.

“Even though people are spending more, they are also getting less for their money due to the Iran war raising energy prices, and tariffs raising countless other prices,” Young said.