US GDP Grows 3.4% in Third Quarter as Inflation Climbs to 3.6%

A strong headline, a strained household

The last big look at the U.S. economy before the November 3 midterms gives each side something to point to. Real gross domestic product grew at a 3.4% annual rate from July through September, up from 2.2% in the second quarter, according to the Bureau of Economic Analysis's advance estimate.1 The same week also brought inflation that is speeding up, a weak hiring trend, a falling savings rate and a 10-year Treasury yield sitting around 5%. My read is that the economy is growing because of a few strong engines, mainly AI investment and spending by better-off households, and that this growth does not show up as broad relief at the kitchen table. That gap explains why upbeat data and unhappy voters exist side by side.

What the GDP report actually shows

The headline beat forecasts. A Reuters poll of economists expected 3.2%26, and CNN cited a 3.0% consensus.30 The result came in just above the Atlanta Fed's final GDPNow estimate of 3.3%.2 BEA said investment, consumer spending and government spending drove the gain, while falling exports pulled it down and a rise in imports, which count against GDP, also weighed on it.1

Business investment did much of the work. CNN reported that it rose at a 12.7% annualized pace, up from 9% the quarter before, as companies kept building AI infrastructure even after the Federal Reserve raised rates.30 By one breakdown of the BEA figures, investment added 3.3 percentage points to growth and consumer spending added 2.6.5 Real consumer spending grew at a 3.8% pace for the second straight quarter.26

The details are less flattering than the headline. One analysis of BEA's contribution tables found that inventory building added about 1.6 points, while trade took away more than 3 points because imports jumped at a nearly 20% rate. Excluding inventories, the economy grew at about 1.7%.2 CNN linked the import surge to businesses stocking up before Canadian tariffs took effect, along with purchases tied to data centers.30 A steadier measure of underlying demand, real final sales to private domestic purchasers, grew 4.9%.1 So underlying demand is solid, but the 3.4% headline rests partly on inventory swings that may not repeat.

It is also a first estimate. BEA will revise it on November 25 and December 23.2 Earlier this year the revisions were large: second-quarter growth was first reported at 1.5% and later raised to 2.2%, while late-2025 growth was cut from 1.4% to 0.5%.2 The election will take place before either revision.

Inflation is moving the wrong way

The price data is where the coverage turns cautious. The PCE price index, the Fed's preferred inflation gauge, rose 0.5% in September, lifting the annual rate to 3.6% from 3.4%. Core PCE, which excludes food and energy, rose to 3.1%.2630 CNN called it a four-month high and said a jump in gas prices was a major cause.30

One figure could confuse readers. BEA's GDP release shows the PCE price index rising at only a 2.1% annualized rate for the third quarter, down from 5.0% in the second.1 Some outlets presented that as cooling inflation.24 The two numbers measure different things. The quarterly figure compares the summer with a spring that included a war-driven energy spike. The year-over-year monthly figure shows prices climbing again in September. Households feel the second one more.

The consumer price index, released October 14, showed the same trend. Headline CPI rose 0.6% in September and 3.7% over the year, up from 3.4% in August and slightly above the 3.6% consensus.31 Gasoline rose 9.1% in the month and made up about half of the increase.31 Gas prices are up 34% from a year earlier and energy prices overall are up 20.4%, which the coverage connects to the war with Iran that began in late February.40 Core CPI rose to 2.6% from 2.4%.32 TD Economics noted that core inflation was running at a 3.4% annualized pace over three months, with gains in shelter, goods and services.36 Heather Long of Navy Federal Credit Union put the problem simply: inflation of 3.7% against wage gains of about 3% means voters' frustration "has justification."37

Spending holds up, savings take the hit

Consumers are still spending, but the monthly data shows the cost of doing so. Nominal spending rose 0.5% in September, down from 0.9% in August, and was flat after adjusting for inflation. The personal savings rate fell to 3.8%, its lowest in almost four years. Inflation-adjusted after-tax income dropped 0.3%.30 NPR reported that higher-income households are leading the spending, while lower-income families struggle more and wages trail prices.21 The Guardian noted that households are drawing down savings to keep spending, and that economists expect spending to slow while gas stays above $4 a gallon.26

Sentiment surveys disagree with each other. The University of Michigan's sentiment index is down 15% since February26, while the Conference Board's October confidence reading came in at 91.7, well above expectations.14 The Michigan decline fits the wider pattern in the reporting, including record-low approval of the president's handling of the economy.26

A labor market that has stalled but not broken

The September jobs report, the last before the election, was weak. Employers added 29,000 jobs against forecasts of about 84,000 to 90,000, and revisions removed 60,000 jobs from July and August.4143 July now shows a loss of 10,000 jobs.43 The unemployment rate rose to 4.2% from 4.1%.42

The details point to a stall rather than a collapse. The household survey showed employment rising by 406,000 and the labor force growing by 485,000, so more people looking for work explains much of the higher jobless rate.41 The broader U-6 measure of underemployment fell to 7.6%, its lowest since January 2025.41 The unemployment rate has stayed between 4.1% and 4.3% since March.45 On the other hand, average hourly earnings were up just 3.0% over the year, which is less than inflation.42 ABC described hiring as growing more slowly while unemployment stays low by historical standards, which fits the data.23

Bonds and the Fed point toward December

The bond market is treating inflation as the main story. The 10-year Treasury yield hit about 5.35% in October before easing back to around 5%.13 It was near 5.02% after the Fed decision on October 2812 and around 5.02% early on October 29, before the GDP release.18 ABC reported that higher long-term rates have lifted borrowing costs on credit cards and mortgages23, and CNN reported that mortgage rates have topped 7% in the past month.20

The Fed held its target range at 3.75% to 4% in a 10-2 vote. Governor Lisa Cook and Cleveland Fed President Beth Hammack dissented because they wanted a quarter-point hike.19 The Fed had raised rates in September for the first time in three years.23 Chair Kevin Warsh said growth was "expanding at a strong pace" and that politics played no part in the decision.2319 After Thursday's data, futures markets put the odds of a December hike at about 85%.23 Fitch's Olu Sonola said the GDP report gave the Fed "another reason" to raise rates.30

The bottom line

Outlets with different political leanings largely report the same facts. Conservative outlets emphasize the beat on growth expectations8, while mainstream and center-left coverage puts affordability first.2126 Moody's Mark Zandi called the growth "very, very fragile."21 That description fits the evidence: growth leans heavily on AI spending, on households that can still afford to spend, and on swings in trade and inventories. Meanwhile, real incomes are falling, savings are shrinking and the Fed appears likely to raise rates again in December. The economy is growing, but most voters will judge it by gas prices and their paychecks.