The U.S. economy is expected to accelerate in the third quarter, with resilient consumer spending and AI-driven corporate investment sufficient to offset the impact of Middle East conflicts on oil prices. This anticipated strong performance contrasts sharply with pessimistic household assessments of the economy—President Trump's approval rating has fallen to a historic low, and consumer confidence has deteriorated significantly. The U.S. Commerce Department will release preliminary third-quarter GDP figures on Thursday (October 29), less than a week before the midterm elections that will determine control of Congress. "People are very unhappy with high energy and food prices, but the fundamentals for consumers remain good. We still have job growth, wage increases, and a strong stock market supporting spending by high-income households, so consumers continue to increase spending at a fairly steady pace," said the chief economist at PNC Financial. Economists surveyed by the media expect third-quarter GDP to grow at an annualized rate of 3.2%, up from 2.2% in the second quarter. However, the survey was conducted ahead of Wednesday's release of the September leading economic indicators report—which showed that the AI spending boom drove strong demand for capital goods imports, widening the goods trade deficit to a record high. Economists estimate that the trade deficit dragged down third-quarter GDP growth by at least 4 percentage points, but AI-related investments may have partially offset this drag. Investors are increasingly concerned about rising costs and uncertain returns on long-term AI projects, but economists do not expect this to hinder the economy.

Main growth engines: AI investment and consumer spending as dual drivers

Business equipment spending is projected to grow by double digits for the third consecutive quarter, with AI also likely boosting spending on intellectual property products, and inventories expected to support growth in the third quarter. EY-Parthenon's chief economist stated, "AI investment may be more cautious, but the underlying momentum remains quite strong. AI-related investments are likely to remain a key pillar of U.S. economic activity, even with some risk of pullbacks and questions about the overall return on investment." Consumer spending, which accounts for more than two-thirds of the economy, is projected to grow at a rate exceeding 3.0%, compared to 3.8% in the second quarter. Historically low layoffs and modest hiring are supporting spending, although wage growth has sometimes lagged behind inflation. Household savings are decreasing, and people are drawing on their savings to sustain spending. With gasoline prices remaining above $4 per gallon due to the ongoing U.S.-Israel war with Iran, economists had previously expected consumer spending to decline. A U.S. economist stated, "Households seemed to judge at the beginning of the year when the conflict erupted that the rise in energy prices was mostly temporary. This judgment may prove wrong, and consumers may need to tighten their belts at some point."

Drag and Hedging: Trade deficits exert pressure for four consecutive quarters, while inventories act as a buffer.

A report of leading economic indicators for September, released Wednesday, showed that a surge in AI spending fueled strong demand for capital goods imports, widening the goods trade deficit to a record high. Economists estimate the trade deficit dragged down third-quarter GDP growth by at least 4 percentage points, marking the fourth consecutive quarter of drag. However, this drag was partially offset by AI-related investment—business equipment spending is expected to grow by double digits for the third consecutive quarter. Inventories are also expected to support third-quarter growth. Domestic demand, excluding inventories, trade, and government spending, is expected to have risen sharply last quarter, with final sales to private domestic buyers growing by 4.6% in the second quarter.

Structural concerns: Housing investment has returned to contraction, and consumption relies on savings and stock market wealth.

The Middle East conflict pushed up mortgage rates, expected to cause residential investment to contract again last quarter. Rising borrowing costs outweighed the effects of cooling house prices, making homeownership unaffordable for young people. Land and labor shortages caused by immigration crackdowns, as well as material prices driven up by import tariffs, also constrained housing construction. The construction of data centers to support AI may have boosted corporate investment in non-residential buildings—a sector that stabilized in the second quarter. Government spending is expected to rebound. A senior economist at the Center for Economic and Policy Research stated, “The overall picture is that the economy is growing at a decent pace, but the main drivers are the AI-driven investment boom and consumption primarily driven by rising stock wealth. It’s unclear how long this will last, but it’s not a very stable picture, and it’s not very positive for most workers.”

Policy implications: With growth exceeding potential levels, the Fed's December rate hike path is unlikely to loosen.

The current pace of economic expansion is far exceeding the approximately 2% non-inflationary growth level estimated by some Federal Reserve officials. The Fed maintained its benchmark interest rate in the 3.75%-4.00% range on Wednesday, while acknowledging that inflation "remains high." Economists expect the Fed to raise rates in December. Fed Chairman Kevin Warsh told reporters that "economic activity is expanding at a strong pace," noting that "domestic spending remains resilient despite ongoing uncertainty—partly due to geopolitical developments." The economy's above-potential growth and persistently high inflation suggest that a December rate hike is unlikely.

in conclusion

The US economy is expected to expand at an annualized rate of 3.2% in the third quarter, with consumption and AI investment forming the twin engines, offsetting the drag from a widening trade deficit and high energy prices. However, structural concerns about growth cannot be ignored—consumption relies on savings depletion and the wealth effect of the stock market, housing investment is constrained by interest rates and supply bottlenecks, and the return prospects of AI investment are also questionable. For the Federal Reserve, an economy growing faster than its potential and inflation remaining high mean that the path to a December rate hike is unlikely to loosen.