Economic growth in the third quarter was fueled by a jump in business investment, rising inventories, and solid consumer spending, despite a significant setback from international trade tied to the U.S.’s reliance on tech imports.
According to the Commerce Department, gross domestic product expanded at an annualized rate of 3.4 percent from July to September. This marked an increase from the previous quarter’s growth of 2.2 percent and surpassed economists’ predictions of 3.1 percent growth.
A closer look at the data reveals that private investment added 3.27 percentage points to the growth, which included 1.78 points from business fixed investment and 1.61 points from inventory increases. However, a decrease in residential investment, indicative of a sluggish housing market, posed a challenge to overall growth.
Consumer spending accounted for another 2.52 percentage points, which was nearly the same as its contribution in the second quarter.
Domestic demand’s strength was somewhat counterbalanced by a significant decline in net exports, which subtracted 3.32 percentage points from growth. Imports surged at a striking 19.7 percent annualized rate, removing 2.64 points from the GDP figure. Exports dropped at a 5.7 percent rate, further reducing growth by 0.68 points.
Business Equipment Investment Surges
One of the most notable aspects of this report was the remarkable strength of business investment, especially in equipment.
Nonresidential fixed investment saw an annualized growth rate of 12.7 percent, contributing 1.78 percentage points to overall GDP growth.
Equipment investment rose at a rapid pace of 20.9 percent, accounting for 1.16 percentage points of the growth. Spending on computers and peripheral equipment alone contributed 0.72 percentage points, highlighting the substantial investment in computing infrastructure.
Meanwhile, other information-processing equipment contributed an additional 0.14 points, and industrial equipment added 0.27 points. Transportation equipment investment, however, declined, detracting 0.09 points.
Investment in intellectual property products, such as software and research, increased at an 8.4 percent rate, adding 0.47 points to GDP growth.
Investment in business structures also saw a resurgence, growing at a 5.4 percent rate after a period of stagnation in the previous quarter. This offered a further contribution of 0.15 points to overall growth.
In contrast, residential investment remained a weak point, dropping at a 3.3 percent annualized rate and removing 0.12 points from GDP growth.
Consumer Spending Remains Strong
For the second consecutive quarter, consumer spending grew at a 3.8 percent annualized rate, contributing 2.52 percentage points to economic growth.
Expenditures on services represented 1.89 points of the increase, an uptick from 1.57 points seen in the second quarter. Meanwhile, spending on goods contributed 0.63 points.
Within services, health care was a notable contributor, adding 0.56 points, while spending in the restaurant and accommodation sectors contributed 0.41 points. Housing and utilities contributed an additional 0.34 points.
Spending on durable goods, however, slowed down, contributing just 0.17 points, a dip from 0.52 points in the second quarter. Nondurable goods spending added 0.47 points.
Inventories and Government Spending Add to Growth
Shifts in private inventories added 1.61 percentage points to GDP growth in the third quarter, a stark reversal from the second quarter, where inventories had a negative impact of 0.53 points.
Government spending also saw a rebound, growing at a 5.3 percent annualized rate and contributing 0.90 points to GDP growth, especially after making almost no contribution in the second quarter.
Government spending was chiefly driven by federal expenditures, which contributed 0.91 points, while spending at the state and local levels remained fairly stable.
Defense expenditure contributed 0.41 points, while nondefense spending added 0.49 points.
Nonetheless, the Commerce Department cautioned that much of the increase in nondefense spending was influenced by an accounting adjustment linked to reduced oil sales from the Strategic Petroleum Reserve. These transactions do not directly affect overall economic output.
Trade Subtracts More Than Three Percentage Points
International trade presented the largest challenge to the domestic economic strength.
The reduction of 3.32 percentage points from net exports was significantly larger than the 1.10-point drag reported in the preceding quarter.
Goods imports surged at a 26.4 percent annualized rate. The Commerce Department indicated that capital goods, excluding automobiles, were the primary contributor to this spike.
Even though imports are deducted when calculating GDP, the increase reflects ongoing purchases by American consumers and businesses, including equipment for domestic investment. Much of this imported equipment is also categorized under domestic investment. The subtraction of imports helps prevent foreign-made equipment from being incorrectly counted as American production in GDP calculations.
The data emphasizes the robustness of private domestic demand, even though the trade deficit significantly impacted the overall growth rate.
Real final sales to private domestic purchasers—which excludes inventories, government spending, and net exports—rose at a 4.9 percent annualized rate, surpassing the 4.6 percent seen in the prior quarter and reaching its fastest growth rate since the second quarter of 2021.
