(Bloomberg) — The U.S. economy expanded at a strong pace in the third quarter as household purchases accelerated ahead of the election and the federal government stepped up defense spending.

Inflation-adjusted gross domestic product rose 2.8 percent annually after rising 3 percent in the previous quarter, according to the government’s initial estimate released Wednesday.

Consumer spending, which comprises the bulk of economic activity, rose 3.7%, the most since the start of 2023. The acceleration was led by broad-based increases in goods, including cars, home furnishings and household items leisure.

At the same time, a closely watched measure of core inflation rose 2.2 percent, roughly in line with the Federal Reserve’s target, Bureau of Economic Analysis figures showed.

The balance sheet for the world’s largest economy illustrated a solid boost in domestic demand as the Fed began rolling out its tightest monetary policy program in decades. It’s also the last before Election Day, as American voters assess the overall snapshot of U.S. economic activity against their own financial situation, which has been hurt in recent years by a high cost of living.

“There is almost nothing wrong with this picture,” Carl Weinberg and Rubeela Farooqi, economists at High Frequency Economics, said in a note. “Continuous rate normalization at a moderate pace is what the economy needs, nothing more.”

The S&P 500 opened lower, the two-year Treasury yield rose and the dollar fluctuated after the GDP data. A separate ADP Research Institute report showing strong private sector hiring in October.

Third-quarter GDP was capped by volatile trade figures, which showed net exports down 0.56 percentage points from the top line. Retailers stepped up imports of consumer goods as the quarter drew to a close amid fears of a prolonged strike by dockers. Inventories also fell by 0.17 percentage points.

Final sales

However, a measure of growth trends favored by economists, which combines consumer spending and business investment, known as final sales to private domestic buyers, rose 3.2 percent, the most this year.

Government spending rose 5% annually, led by the largest increase in federal output since early 2021. National defense spending rose 14.9%, the most since 2003. Federal government spending, excluding defense, grew at the fastest rate in a year.

Non-residential fixed investment rose 3.3% annually, the slowest in a year and weighed down by spending on structures. However, business spending on equipment was the highest in the second quarter of 2023, boosted by transportation.

Spending on computers and peripherals grew 32.7%, the most since 2020, illustrating the ongoing boom in artificial intelligence.

Residential investment fell 5.1 percent annually, the most since the end of 2022, as the housing market struggled under the weight of high mortgage rates and prices.

The numbers should keep the Fed on track to continue cutting interest rates in the coming quarters, including at their meeting next week. The numbers are good news for Vice President Kamala Harris in the final days of her campaign against former President Donald Trump.

Compared to a year earlier, GDP grew by 2.7% – holding above 2.5% for the sixth consecutive quarter. This is “the longest stretch of such solid growth since 2006,” Bill Adams, chief economist at Comerica Bank, said in a note.

However, growth has not been evenly distributed in recent years, as the share of revenue going to profits has remained well above historical norms. After-tax personal income adjusted for inflation rose 1.6 percent annually, the slowest advance in a year, GDP data showed.

What Bloomberg Economics Says…

“The headline GDP print for Q3 makes the economy look strong, but beneath the surface things are less stable. Consumer spending, the main driver of growth, has been boosted closely by higher-income households, while lower-income ones have become more price-sensitive.”

— Eliza Winger, economist

For the full note, click here

A breakdown of corporate profits and employee compensation for the third quarter will be released next month with the BEA’s second GDP estimate for the period.

–With the assistance of Cécile Daurat.

(Add economist’s comment, graphic)

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