The U.S. Investment Boom Arrives GDP growth comes in strong at 3.4% and would be stronger without tariffs and deportation.
The WSJ Editorial Board:
It’s hard to recall a time with such a large disconnect between how Americans feel about the economy and the data. The Commerce Department on Thursday reported that GDP grew 3.4% in the third quarter thanks to surging business investment and buoyant consumer spending. So why are Americans so glum?
By objective measures, the economy is firing on most cylinders. Consumer spending remains healthy and contributed 2.52 percentage points to the third-quarter GDP increase. Even if consumers fume about higher prices, they aren’t tightening their belts. Spending on motor vehicles, household furnishings, restaurants and travel increased.
Business investment accounted for 1.78 percentage points of third-quarter GDP and grew at the fastest rate in 15 years, aside from the Covid lockdown bounceback in 2020’s third quarter. The AI boom is the main driver, but deregulation and the 2025 tax reforms, especially 100% business expensing, have also provided a lift.
Information processing equipment made up roughly half of the investment increase, while intellectual property (IP) chipped in 0.47 percentage points. (…)
Net exports subtracted 3.32 percentage points from top-line GDP growth owing to increased imports. But this is a deceptive artifact of the national accounts, since imports flow into consumer spending and investment. Imports of computer chips, gas turbines, copper and more help fuel the investment boom. (…)
Tariffs are a drag on growth. Investment in manufacturing plants declined 4% in the third quarter and has fallen 36% in his second term. Border taxes have increased uncertainty and business costs, which make it harder for manufacturers to invest. (…)
U.S. steel prices have increased 52% over the past year and are about two-thirds higher than in Europe. That’s a killer for U.S. makers of appliances, machinery and electric power equipment.
The other major drag on growth is housing, which subtracted 0.12 percentage points from third-quarter GDP. Higher interest rates are the main culprit, but the silver lining is that the housing slowdown has freed up workers for other projects like data centers. Construction firms say they struggle to find workers because of an aging workforce and deportations.
Nearly two-thirds of builders said immigration enforcement is affecting their workforce, compared to 13% a year ago, according to a John Burns Research and Consulting survey. Immigration raids have forced beef processing plants to reduce production. One result: Higher beef prices. (…)
Therein lies the main source of voter unhappiness: Inflation. (…)
The U.S. economy in Mr. Trump’s second term is in many ways a story of what might have been. Deregulation, AI and tax cuts have led to an investment and productivity boom, but inflation and antigrowth tariffs and mass deportation are diminishing what could be a broader prosperity. The GOP may pay a political price next week.
Another reading might be that even with deregulation and tax cuts “Investment in manufacturing plants declined 4% in the third quarter and has fallen 36% in his second term” and “Net exports subtracted 3.32 percentage points from top-line GDP growth”.
The US economy is essentially AI spending and AI-sponsored consumer spending from the wealthiest.
(Bloomberg)
S&P Global Ratings estimates that high-tech business investment in things like IT equipment, software and research and design accounted for more than a third of GDP growth over the past year, even after accounting for the fact that chip imports are a drag on GDP. That’s up from less than a quarter in the first half of the year.
Massive data-center spending has been fueling economic growth all year. Goldman Sachs recently projected that artificial-intelligence investment in the U.S. will hit a staggering 1.9% of GDP. While much of that money is spent on imported chips, the boom is also creating plenty of construction jobs in the U.S. as developers race to build server farms. The rise in construction spending has helped compensate for a decline in home-building.
A measure of underlying demand that carves out more volatile government, inventory and international trade numbers also strengthened. Called final sales to private domestic purchasers, this measure rose at a 4.9% rate in the third quarter. That was the fastest pace since the second quarter of 2021, when the economy was bouncing back from the pandemic.
Another driver of economic growth has been massive government borrowing. The federal debt hit 100% of GDP for the fiscal year ending in September. That’s the highest level since 1946, when the U.S. was heavily indebted because of the cost of fighting in World War II. (WSJ)
(…) In our view [Ed Yardeni], the [FOMC] decision was puzzling. It reminds us of someone standing in a room with a fire alarm blaring and smoke pouring under the door, yet insisting on more evidence before calling the fire department. Thursday’s economic data only reinforced our conviction that the Fed should have raised rates by 25bps on Wednesday. (…)
Consumer spending and business investment are driving the US economic boom. Federal government spending is too, rising 15.8% last quarter. (…)
Core PCED inflation, excluding food and energy, increased 0.3% m/m and 3.1% y/y. Both remain stubbornly above the Fed’s inflation target. Furthermore, Warsh’s inflation diffusion measure shows that nearly half of PCED components rose more than 3.0% y/y, compared with a pre-pandemic average of just 32%. (…)
Tariff-related price pressures have yet to subside, while the AI investment boom is adding to inflation across the technology sector. Prices for computers and software are rising at record annual rates. Together, these forces suggest goods inflation is unlikely to ease meaningfully soon.
Services PCED inflation rose to 3.5% y/y in September. Supercore services inflation, excluding housing and energy, edged up to 3.6% y/y. It has been trending higher since late 2025, underscoring persistent underlying price pressures.
Services inflation remains broad-based, with most major categories rising around 3.0% y/y or more. Transportation services inflation has been particularly troublesome as higher energy costs feed through to service prices. (…)
September’s saving rate declined to 3.8%, the lowest since 2022. We expect it to fall further as retiring Baby Boomers continue spending their sizeable net worth because they are no longer earning labor income.
This Wolfstreet.com chart illustrates how unusually hot the US economy is:
“So for a moment, forget the jump in government spending, forget imports and exports, forget the confusing inventory adjustment. This is the private US economy, and it’s hot.”
Real consumer spending rose at a 3.8% annual rate 2 quarters in a row! This growth rate contributed 2.5pp to GDP growth of 3.4% in Q3.
Spending growth stalled in September however. Back-to-school sales are often a good indicator for holiday sales.
The growing problem is that average real hourly earnings have fallen for six straight months. Spending is sustained mainly through dissaving: actual use of savings for the affluent, increased borrowings for others.
Inflation is a growing cancer in the US. Core PCE inflation was +0.32% after an upwardly revised +0.26% in August, that’s +3.5% a.r.. Core PCE inflation increased 3.1% YoY in September after +3.0% in August.
Supercore inflation is accelerating:
(charts by Sethi Associates)
- The initial GDPNow model estimate for real GDP growth in the fourth quarter of 2026 is 3.2 percent.
Even Amazon is suffering:
(…) Its fourth-quarter outlook points to weaker retail sales during the holidays as American and global consumers face of a rising cost of living alongside higher fuel prices due to the Iran war.
Chief financial officer Brian Olsavsky told investors Amazon expected a bigger hit from high fuel and transportation costs in the fourth quarter, even after it added a 3.5 per cent surcharge in April to the fees it charges third-party sellers.
Recall, however, that Q2 sales were positively impacted by Amazon’s Prime Day shift from Q3 to Q2 this year and by the World Cup. Amazon said third-quarter growth would have been about 400 basis points higher without the shift.
Neil Sethi: “Combining the second and third quarters to wash out the timing, total revenue rose 15.7%: North America 11.0%, International 9.8% and AWS 38.1%. Adjusted for Prime Day, the retail business is growing closer to 11% than 6%.”
BTW, Alphabet also mentioned the Q2 World Cup advertising to partly explain its Q3 slowdown in Search revenues.
US Consumers Are Disillusioned About the Economy
(…) Views on the economy are deteriorating among every group of Americans except those with considerable stock wealth. America’s wage, income and wealth distribution is more similar today to the 1920s than any other prior period: Aggregate figures that track overall spending could still look good even as numbers that measure personal spending do not. (…)
Just over 40% of Americans believe that their personal financial situation will be worse in a year, a full 10 points higher than the prior record in the series, reached during the early 1980s. Just over 30% believe that their personal financial situation will be worse in five years, double the share that did in the 1980s.
(…) only three times since 1970 have more than half of Americans reported that the government was doing a poor job managing the economy. It’s now at 74%. (…)
The debate over whether the data is painting too rosy a picture of the US economy, or whether US consumers are taking too bleak a view of it, is beside the point.
The conclusion both these surveys are pointing toward is that the dominant conservative policy of the past 50 years — cutting taxes and welfare programs, deregulating, spending generously on defense, avoiding any meaningful action on Social Security — has run its course.
Americans are signaling both a hopelessness about the economy and rejection of how it is managed. That’s the message policymakers in Washington need to hear.
Perhaps it goes beyond the economy or inflation:
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Trump Approval Rating: Net -19 A Week Before Election Day The latest poll shows voters prefer Democratic congressional candidates over Republicans by double digit margins.
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In February 2025, 46% approved the direction of the country. It’s down 30% now.
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What do you think is the most important problem facing this country today?
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Government/Congress: 26%
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High cost of living/Inflation: 17%
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Economy in general: 15%
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Fuel/Oil prices: 7%
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New survey finds more than two-thirds of Americans believe their country is in decline
The 2026 survey data also showed a 15-point jump in the percentage of Americans who agree with the statement: The United States is in decline. The number is at 70% this year, up from 55% in 2025.
That number, 70%, is exactly what it was in 2023, the first year the American Communities Project did a survey. In 2025, the “decline” number dropped to 55%, and that change was largely driven by communities that voted for President Donald Trump in the 2024 presidential election.
It was a measure of hope for the future, and it showed in massive improvements in the general hopefulness in communities such as the evangelical hubs, concentrated heavily in the South, rural middle America and the middle suburbs.
The fact that the “decline” number is back to 70% suggests those same Trump-supporting communities have seen their hopes take a hit – and a deeper analysis of the data on the American Communities Project website shows just that.
At the very least, the data suggests a very disillusioned electorate.