US economy beats forecasts with 3.4% growth ahead of midterms

The US economy expanded at an annualized rate of 3.4 percent in the third quarter, surpassing the 3.2 percent forecast made by economists polled by Reuters. The Bureau of Economic Analysis released this advance estimate on Thursday, just one week before the midterm elections.

Growth was fueled by strong consumer spending and business investment in artificial intelligence. These factors outweighed the negative impact of higher oil prices caused by the conflict in the Middle East. Estimates from analysts varied widely, with predictions ranging from a 1 percent to a 4.2 percent growth rate.

This economic performance stands in contrast to public sentiment. Households have expressed a downbeat view of the economy, a feeling reflected in President Donald Trump's record-low approval ratings and falling consumer confidence. The report arrives as the country prepares to decide control of Congress on Tuesday.

The Federal Reserve held its benchmark interest rate in the 3.75 to 4 percent range on Wednesday. The central bank noted that inflation remains elevated. Kevin Warsh, the Fed chairman, told reporters that economic activity is expanding at a strong pace. He added that domestic spending has been resilient despite geopolitical uncertainty.

Some economists questioned whether the strong GDP figures accurately reflect the broader economy. They pointed to the increasing dominance of AI-related spending. Tech firms have borrowed large sums over the past year for AI projects, creating potential downside risks for equipment spending. Investors are watching these long-term costs closely as payoffs remain uncertain.

Consumer spending, which makes up more than two-thirds of the economy, grew at a 3.8 percent pace in the July to September period. This matches the growth rate seen in the second quarter. Low layoff rates and moderate hiring have supported this spending, though wage gains have sometimes trailed inflation.

Households are saving less and using savings to fund their purchases. Average gasoline prices remain above $4 per gallon as the war between the US, Israel, and Iran continues. Economists expect this high cost of fuel to slow consumer spending in the coming months.