Economy Grew at a 3.4% Rate in the Third Quarter, Faster Than Spring, as Businesses Stocked Up and Bought Computers

The U.S. economy grew at a 3.4% annual rate from July through September, up from 2.2% in the spring, according to the advance estimate of third-quarter gross domestic product released Thursday by the Bureau of Economic Analysis. It was the last major reading on the economy before Tuesday's midterm elections.

At a quarterly rate, without annualizing, real GDP grew 0.8%, the bureau said. Current-dollar GDP, which includes the effect of rising prices, grew at a 5.6% annual rate.

The bureau said the increase reflected higher investment, consumer spending and government spending, partly offset by a decline in exports. Imports, which are subtracted when calculating GDP, rose. Compared with the second quarter, the acceleration mainly reflected faster investment growth and an upturn in government spending, offset by a downturn in exports.

Much of the investment growth came from businesses adding to inventories and buying equipment. The largest contributors to inventory investment were wholesale trade and manufacturing, both led by nondurable goods industries, according to the release. Within equipment, the increase was led by information processing equipment, mainly computers and peripherals, based on import data.

Consumer spending rose for both services and goods. On the services side, the increase was led by health care, mainly hospitals and outpatient services, and by food services and accommodations. On the goods side, it was led by "other nondurable goods," mainly prescription drugs, the bureau said.

The government piece has an unusual explanation. The increase in government spending was more than accounted for by federal spending, led by nondefense consumption. That pattern mainly reflected sales of crude oil from the Strategic Petroleum Reserve, the bureau said. In the national accounts, those sales are subtracted from government consumption, so when the government sold less oil in the third quarter than in the second, federal consumption rose. Because the oil sold shows up elsewhere in GDP, the bureau said, "there is no direct effect on GDP."

The price index for gross domestic purchases measures prices paid by U.S. residents for everything they buy, including imports, while the PCE index covers only consumer purchases. Both slowed in the third quarter, the release shows, after sharp increases in the spring.

Exports fell, led by petroleum and related products, while the largest contributor to imports was capital goods other than autos.

A measure economists watch for the strength of underlying demand, real final sales to private domestic purchasers, rose at a 4.9% rate, up from 4.6% in the second quarter. That figure combines consumer spending and private fixed investment and excludes inventories, government and trade.

Inflation as measured in the GDP report cooled sharply from the spring. The price index for gross domestic purchases rose at a 3.0% rate, down from 5.6%. The personal consumption expenditures price index rose at a 2.1% rate after a 5.0% rate in the second quarter, and the core PCE index, excluding food and energy, rose 2.5% after 3.3%.

Those quarterly figures look calmer than the monthly ones. In a separate report Thursday, the bureau said the PCE price index rose 0.5% in September alone and 3.6% from a year earlier, as fuel costs stayed high. A quarterly average can mask a late-quarter jump.

For readers comparing this report with the monthly figures, the bureau publishes quarterly percent changes at annual rates, meaning it shows what growth would be if the quarter's pace continued for a full year. The 0.8% quarterly figure is the actual change from the second quarter to the third.

The advance estimate is the first of three, built on incomplete data, and is often revised. The bureau's release notes that its key source data and assumptions are published in a separate table, and that with the next release "today's data will be superseded." The second estimate, along with corporate profits, is scheduled for Nov. 25 at 8:30 a.m.

What the report does not say is how the economy is splitting by income or region. GDP is a national total. The bureau's state-level GDP figures for the third quarter come later, and the household-level picture is in the monthly income report, which showed inflation-adjusted disposable income falling in September.

Still unknown: how much of the inventory build reflects businesses getting ahead of tariffs or fuel costs, and how large the revisions will be when more complete data arrive.