U.S. Economy Grew 3.4% in Third Quarter on AI Spending, but Inflation Runs at 3.6%

The U.S. economy grew at an annual rate of 3.4% from July through September, the Commerce Department reported Thursday, a faster pace than the 2.2% rate of the previous quarter and a strong reading to land just days before the midterm elections.

Gross domestic product, the broadest measure of economic activity, was driven in large part by heavy investment from AI companies, which continue to build data centers and spend heavily to develop the technology. Consumer spending was the other major driver, led in part by higher-income Americans who are better able to withstand stubbornly high inflation.

The headline number sits awkwardly beside how many Americans say they feel. Inflation has pushed up the cost of everyday necessities, and the ongoing conflict with Iran is driving up energy costs such as gasoline. A separate Commerce Department report showed prices rose 3.6% in September from a year earlier, well above the Federal Reserve's 2% target. The personal saving rate fell to 3.8% in September from 4.1% in August.

Consumer spending has not been shared evenly. Lower-income households are struggling more than high earners, and wage growth has fallen behind inflation, squeezing family budgets further. Siri Steven, a manager at a resale store in Decorah, Iowa, said she and her husband are putting off repairs to their more than 130-year-old house. "We barely go out to eat now," Steven said. "I really have to be mindful of our budget and make sure that we can pay all our bills and not overdraft." She said her family has not been able to save and lives paycheck to paycheck.

The Fed watches the Commerce Department's inflation measure closely when it sets its benchmark interest rate. The central bank decided against raising rates on Wednesday, but Thursday's price reading adds pressure for a hike at its next meeting in December.

Economists say the growth is real but brittle. Mark Zandi, chief economist at Moody's Analytics, pointed to the Trump administration's policies, including tariffs and the U.S. war against Iran, as obstacles that businesses and consumers have to navigate. "We're growing," Zandi said. "The economy is moving forward but it's a very, very fragile growth. It doesn't feel like we're kicking it in on all cylinders."

Economists are also worried about the country's long-term fiscal health. With voters set to go to the polls Nov. 3, the mix of solid growth, high prices and thin household savings gives both parties material for their closing arguments on the economy.