Q3 GDP Forecasts Climb After August Consumer Spending Surge

Forecasters mark up the third quarter

The U.S. economy is heading into the October 29 GDP report with more momentum than most forecasters expected at midsummer. Over the past month, economists have raised their third-quarter estimates. Most now project annualized growth of about 3.0%, up from the 2.2% pace recorded in the second quarter.2123 A median of several nowcasts tracked by The Capital Spectator puts the third quarter at 3.2%, which would be the economy's best quarter in a year.28 The Bureau of Economic Analysis has scheduled its advance estimate of third-quarter output for October 29.26

The revisions began with a strong run of consumer data in September. August retail sales rose 1.2%, well above the 0.8% rebound economists surveyed by Reuters had expected, and the surprise led forecasters to raise their GDP estimates for the quarter.27 Two weeks later, the Bureau of Economic Analysis reported that personal spending jumped 0.9% in August, compared with a downwardly revised 0.1% gain in July.1213

The forecasts now cover a wide range, and the spread says something about the economy. The Atlanta Fed's GDPNow model peaked at 5.1% in mid-September, after a jump from 4.4%.9 It has since fallen to 3.6%.56 EY expects growth above 4%.25 The American Bankers Association's panel of bank economists projected a more cautious 2.7% in late September.29 Every forecaster sees acceleration. They disagree about how much of it to trust.

The consumer carried August

The August spending figures were strong even after adjusting for prices. Inflation-adjusted personal consumption expenditures rose 0.6% for the month.13 That was the largest monthly gain since March 2025, according to Bloomberg figures cited in one breakdown of the release.19 Of the $190.8 billion increase in nominal spending, $114.1 billion went to goods and $76.7 billion to services.13 Gasoline and energy goods, restaurants and lodging, and motor vehicles were among the largest contributors.19

The forecast changes show how much the consumer data mattered. On September 16, after new Census and Labor Department figures, GDPNow raised its estimate of third-quarter real consumer spending growth from 3.6% to 4.1%.9 That was a large part of the jump to a 5.1% headline estimate.9 Spending had already been rising before August. The BEA's annual revisions show real consumer spending grew at a 3.8% annualized rate in the second quarter, up from 0.7% in the first quarter.24 EY attributed much of that strength to services spending by affluent households and to strong purchases of durable goods.25

Income is not keeping pace

This is where the coverage diverges, and the divergence matters for the fourth quarter. Personal income rose only 0.2% in August, short of the 0.4% consensus. Real disposable income was flat.1317 Households spent more without real income growth to pay for it, and the personal saving rate fell to 4.1%.13 One analysis of the release estimates that households saved about $122 billion less than in July and calls the saving rate the lowest in nearly four years.19

The annual data revisions complicate that picture. Before the update, Deloitte noted that the saving rate had been at or below 3% since April 2026. Over roughly 67 years of monthly data, that had happened in only 41 months, mostly in the housing-bubble years of 2005 to 2008.22 The revised figures put households in a better position. EY reports that the second-quarter saving rate was revised up by 1.6 percentage points to 4.4%.25 Even so, the direction is clear. Deloitte points out that consumer spending has grown faster than after-tax income for more than two years, and it expects households to pull back.22

The main question is who can keep spending. Some of the strength appears to come from stock market gains. Reuters linked consumer resilience partly to an AI-driven equity rally, and Deloitte cites positive wealth effects alongside last year's tax cuts.1922 Lower-income families are under more strain. Pump prices have risen again since August, real wages have fallen, and BMO Capital Markets chief U.S. economist Scott Anderson expects weaker purchasing power to weigh on real consumer spending in the fourth quarter and into 2027.27 Cerity Partners estimates that higher gas prices have cost each household about $500 since the conflict with Iran began. It argues that consumers overall have absorbed the cost, helped by low household leverage.8

Inventories and imports are moving the headline number

The sharp decline in GDPNow's estimate is not mainly about consumers. In the October 6 update, the model's estimate of real consumer spending growth actually edged up, from 3.3% to 3.4%. Higher figures for investment were offset by a larger drag from net exports, now estimated at -2.69 percentage points.3 On October 8, a downward revision to wholesale inventories cut the estimated inventory contribution from 2.07 to 1.98 percentage points, and the headline estimate slipped to 3.6%.56

The third quarter therefore depends heavily on two volatile components. Businesses are rebuilding inventories that had been drawn down for five straight quarters.23 Economists expect inventories to add to growth after subtracting 0.53 percentage point in the second quarter, while trade could subtract as much as 2.5 percentage points.2123 Much of the import surge reflects the AI buildout. U.S. companies are buying foreign capital goods and industrial supplies, and imports rose almost 13% in the second quarter.24 GDPNow also projects real gross private domestic investment growing at more than 21% annualized.3

The consensus is lower than the GDPNow model, and that gap makes sense. GDPNow is a mechanical model with no judgmental adjustments, and swings in trade and inventories can move its headline without a matching change in domestic demand.5 Forecasters around 3% are discounting the inventory boost, and that is the more reasonable reading.

The Fed and the inflation backdrop

Stronger growth is a complication for the Federal Reserve. The Fed raised rates in September, reversing three cuts made late last year.22 Before that decision, GDPNow's 5.1% estimate was cited as a reason policymakers would see little need to ease.9 The August price data gave the Fed some relief. Headline PCE inflation was 3.4% year over year and core was 3.0%, both below expectations of 3.7% and 3.3%.18 Part of that improvement comes from revisions, not falling prices. The annual update lowered July's figures from 3.7% to 3.4% for headline inflation and from 3.3% to 3.0% for core.18 RBC called the change a retroactive revision rather than a disinflationary signal.19

Fifth Third Wealth Advisors described the combination of stronger growth, firm spending and softer inflation as a "goldilocks" result. It said the data reduce the chance of an October rate hike while leaving a fourth-quarter hike possible.24 Cerity Partners expects at least one more increase this year.8 Deloitte expects another hike before year-end.22 Higher borrowing costs are another headwind for the consumer. Cerity notes that the 10-year Treasury yield rose above 5.2% during the quarter, its highest level since before the global financial crisis.8

The likely reading: strong now, slower later

The evidence supports a clear conclusion. The third quarter will probably be strong, likely around 3% or a little higher. Consumers will be a major contributor, alongside an AI investment boom that is lifting both capital spending and imports.2228 The headline number will flatter the economy's underlying pace, though. Inventory rebuilding is temporary, and consumer spending is outpacing income because households are drawing down savings.513

Few forecasters expect this pace to continue. The ABA panel projects 2.2% growth in the fourth quarter, Cerity expects a return to about 2%, and EY expects the economy to settle near 2% over the next 12 months.29825 Deloitte's warning about consumer finances is the most important for the outlook. When spending has outpaced income for more than two years, the adjustment is likely to come from spending.22 The October 29 report will probably show the economy accelerating, but the gains are concentrated among stockholders and the AI sector, and they are unlikely to last into next year.