US Q3 GDP growth is expected to accelerate to 3.2%: The AI investment boom is underpinning growth, yet the public's "lived experience" is decidedly grim.

Note that US economic growth likely accelerated in the third quarter as resilient consumer spending and AI-driven business investment were enough to offset the impact of higher oil prices triggered by the Middle East conflict. This expected strong performance will contrast sharply with households' pessimistic assessment of the economy, reflected in President Trump's approval rating falling to a historic low and a sharp deterioration in consumer confidence. The Commerce Department will release its first estimate of third-quarter gross domestic product (GDP) on Thursday, less than a week before next Tuesday's midterm elections, which will determine control of Congress. "The public is very unhappy with high energy and food prices, but consumer fundamentals are still decent," said Gus Faucher, chief economist at PNC Financial. "We still have job growth, rising wages, and a strong stock market, which especially supports spending by higher-income households, so consumers are still increasing spending at a fairly steady pace." A Reuters survey of economists expects GDP to have grown at a 3.2% annualized rate last quarter. Growth was 2.2% in the April-June quarter. However, the survey was conducted before Wednesday's release of the September leading economic indicators report. That report showed strong demand for capital goods tied to the AI spending boom pushed imports to a record high, widening the goods trade deficit. Economists estimate that the trade deficit subtracted at least 4 percentage points from GDP growth last quarter. But that drag may have been offset by AI-related investment, with business equipment spending expected to have grown at a double-digit pace for a third consecutive quarter. AI may also have boosted spending on intellectual property products. Inventories are also expected to have contributed to GDP growth last quarter. Investors are increasingly focused on the rising costs of long-term AI projects with uncertain returns. Over the past year, technology companies have borrowed enormous sums to fund AI spending, posing a potential downside risk to equipment spending. Still, economists do not believe this will hold back the economy. "There may be more prudence going forward on AI investment, but the underlying momentum remains quite strong," said Gregory Daco, chief economist at EY-Parthenon. "AI-related investment will likely remain a key pillar of US economic activity, even with some pullback risk and some questions about the return on all of that investment." The US economy is expanding much faster than the roughly 2% non-inflationary pace some Fed officials believe is appropriate. The Fed on Wednesday held its benchmark interest rate in the 3.75%-4.00% range while acknowledging that inflation "remains somewhat elevated." Economists expect the Fed to raise rates in December. Fed Chair Kevin Warsh told reporters that "economic activity is expanding strongly" and noted that "domestic spending has been resilient, although uncertainty remains, partly due to geopolitical developments." Consumer spending expected to be strong Consumer spending, which accounts for more than two-thirds of the economy, is expected to have grown more than 3.0% last quarter after rising 3.8% in the second quarter. Historically low layoffs and modest hiring are helping support consumption, even though wage growth has at times lagged inflation. Households have been reducing savings and drawing down reserves to support spending. With the US-Israel war with Iran still ongoing, average gasoline prices remain above $4 per gallon, and economists had expected consumer spending to pull back. "It looks like households judged when the conflict broke out earlier this year that the rise in energy prices was probably temporary," said Stephen Stanley, chief US economist at Santander US Capital Markets. "That judgment may prove wrong, so consumers may need to tighten their belts at some point." Mortgage rates, which rose due to the Middle East conflict, are expected to have pushed residential investment back into contraction last quarter. Higher borrowing costs outweighed the impact of slower home price appreciation, making it difficult for young adults to achieve homeownership. Homebuilding is also constrained by land and labor shortages (stemming from tighter immigration policy) and by import tariffs pushing up material prices. Data center construction to support AI may have boosted business investment in nonresidential structures after stabilizing in the second quarter. Government spending is expected to rebound. A measure of domestic demand excluding inventories, trade and government spending is expected to have climbed sharply last quarter. In the second quarter, final sales to private domestic purchasers rose 4.6%. "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 driven mainly by stock market wealth gains," said Dean Baker, senior economist at the Center for Economic and Policy Research. "It is unclear how long this can last, but it is not a very stable picture, nor is it a very positive picture for most working people."