US economy posts strong growth, inflation stubbornly high in challenge to Trump
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WASHINGTON: The United States posted strong economic growth in the third quarter, but the Fed's preferred inflation gauge also accelerated, the Commerce Department said on Thursday (Oct 29), in a mixed economic bag for US President Donald Trump ahead of key midterm polls next week.
Real GDP increased at an annual rate of 3.4 per cent in the third quarter, the department's Bureau of Economic Analysis (BEA) said in a statement, beating market expectations.
"The contributors to the increase in real GDP in the third quarter were increases in investment, consumer spending, and government spending that were partly offset by a decrease in exports," the BEA said in a statement.
The US Federal Reserve's preferred gauge for inflation - the Personal Consumption Expenditures (PCE) price index - rose by 3.6 per cent year-on-year in September, an increase from the previous month.
Trump's handling of the economy is a key issue for voters heading into midterm elections on Tuesday, where Democrats are seeking to wrest control of both houses of Congress from the president's Republican Party.
The US-Israel war on Iran has sent global energy prices skyrocketing due to Tehran's retaliatory action, with US consumers paying an average of 42 per cent more at the pump for regular gasoline, according to data from the AAA motor club.
The president's wide-ranging tariff policies have also upended global trade and fuelled inflation.
STRONG GDP GROWTH
The strong GDP growth will come as a boon to Trump, who has touted the strength of the economy despite the high prices that have posed a challenge to households across the country.
Much of the economic growth has been driven by an investment boom in Artificial Intelligence (AI) technology, which has seen companies spend billions on new models and in building the data centres that power them.
The BEA said the acceleration in GDP growth was driven by an increase in investment and an upturn in government spending, which were partially offset by a decrease in exports.
Imports - which are a subtraction in the formula for GDP - also increased more in the third quarter than the previous one.
Thursday's GDP data was an advance estimate released by the BEA, with two further estimates due in the coming weeks that could see the number revised.
Economists have warned for months that while US GDP growth has remained resilient despite price pressures from the war, outcomes have been highly uneven, with wealthier households prospering while working class families struggle.
FED IMPLICATIONS
The Fed prefers to use the PCE price index when gauging inflation, as it takes into account a broader range of household expenditures than Consumer Price Index (CPI) inflation.
On Wednesday, the US central bank voted to keep interest rates steady, citing the need for more data to gauge how best to battle the surging inflation.
Chair Kevin Warsh reiterated the Fed's commitment to its long-term two-per cent target for PCE inflation, which it has not achieved for more than five years.
He termed current inflation levels "too high" but cautioned against moving too quickly, saying the Fed had seen some tightening of financial conditions in response to the Fed raising interest rates in September - its first hike in three years.
Markets largely expect the Fed to raise rates again by a quarter-point in December.
"FAILED AGENDA"
Trump's political opponents slammed his handling of the economy over the quickening PCE figure, which showed a 21.3 per cent year-on-year increase in the prices of energy goods and services.
"Today's data confirms families paid more in September for gasoline, housing, and health care," said Democratic Senator Elizabeth Warren.
"Since Trump took office, families have paid US$3,772 on average because of inflation. Trump's failed agenda is driving up costs and eating into Americans' paychecks."
Heather Long, chief economist at Navy Federal Credit Union, said the US economy was "on steroids right now" but that high inflation was its "Achilles heel."
"Growth came in stronger than expected and it's largely due to the massive AI business investment surge," she said. "The AI boom is adding almost a full percentage point to growth."
Gregory Daco, chief economist at EY-Parthenon, said spending by consumers was still high, but "they are increasingly stretching their budgets to afford pricier goods and services."
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