US Economy Grew 3.4% in the Third Quarter, Fed's Favorite Inflation Gauge Matches Forecasts (UPDATED)

Editor’s Note: Article updated with additional content.

The U.S. economy grew at a 3.4% annualized pace in the third quarter, according to the Bureau of Economic Analysis’s advance estimate released Thursday.

The outcome topped economists’ expectations of 3.2% and marked an acceleration from the 2.2% growth in the second quarter.

Real consumer spending grew 3.8%, the same pace as in the second quarter.

In a separate release, September’s personal consumption expenditures (PCE) price index, the Federal Reserve’s preferred inflation gauge, rose 3.6% from a year earlier in September, matching expectations and accelerating from 3.4% in August.

On a monthly basis, prices rose 0.5%, also as expected.

Core PCE rose 3.1% year over year, in line with estimates and up from 3% previously. Month over month, core prices rose 0.3%, matching the consensus.

Personal income rose 0.2% in September, below the 0.3% forecast. Personal spending increased 0.5%, versus expectations of 0.6% and 0.9% in August.

On Wednesday, the Federal Reserve held interest rates steady at 3.75%-4.00%, pausing after the September hike.

Businesses Stocked Up as AI Spending Kept Flowing

Investment drove most of the acceleration. Companies built up inventories, led by wholesalers and manufacturers.

Equipment spending also rose, led by computers and peripheral equipment, as the AI buildout continued.

However, much of that equipment came from abroad. Imports rose faster than in the second quarter, led by capital goods.

Because GDP subtracts imports, that weighed on the headline figure. Exports fell, mainly because petroleum shipments dropped.

Fed Hike Bets Hold Steady

Shortly before the release, traders saw an 83% probability of a 25-basis-point hike at the Fed’s Dec. 9 meeting, according to the CME FedWatch tool.

That was little changed from 84.2% a day earlier, but up from 73.3% a week ago and 49.4% a month ago.

Interest rate swaps were little moved after the data.

Treasury Yields Hover Near 5%

The bond market took the report calmly.

The 10-year Treasury yield edged up less than 1 basis point to 5.01%, holding just above the 5% mark. The 2-year yield, which is more sensitive to Fed expectations, rose 1 basis point to 4.70%. Meanwhile, the 30-year yield was flat at 5.33%.

The U.S. dollar index was unchanged at 102.15.

Precious metals came under pressure. Spot gold fell 1.1% to around $4,025 an ounce, while silver dropped 2.8% to $52.45.

Bitcoin (CRYPTO: BTC) fell 1.5% to roughly $80,040.

Big Tech Earnings Drag Nasdaq Futures

Corporate earnings, rather than macro data, drove stock moves.

Nasdaq 100 futures fell 1.2%, and S&P 500 futures slipped 0.4%. Dow futures lost 0.3%. Small caps went the other way, with Russell 2000 futures up 0.3%.

The Invesco QQQ Trust (NASDAQ:QQQ) fell 1.3% in premarket trading. The SPDR S&P 500 ETF Trust (NYSE:SPY) declined 0.4%.

Alphabet Inc. (NASDAQ:GOOGL) was the biggest drag, sliding 11.5% to around $288. Its third-quarter report, released after Wednesday’s close, disappointed investors, even though Google Cloud grew strongly.

Software stocks sold off after earnings. Fortinet Inc. (NASDAQ:FTNT) plunged 27.6%, and ServiceNow Inc. (NYSE:NOW) sank 18.3% after its outlook fell short of expectations.

Caterpillar Inc. (NYSE:CAT) dropped 11% after third-quarter revenue missed forecasts. Higher tariff costs and rising inventories also weighed on the shares. As one of the most heavily weighted stocks in the Dow, Caterpillar pulled the blue-chip index’s futures lower.

Marvell Technology Inc. (NASDAQ:MRVL) fell 12.1% on reports that it is in talks to buy Lumentum Holdings Inc. (NASDAQ:LITE). Lumentum rose 5.4%.

On the upside, Carvana Co. (NYSE:CVNA) jumped 8.6% after quarterly revenue topped $8 billion for the first time. Chipotle Mexican Grill Inc. (NYSE:CMG) rose 8.4% after reporting its third straight quarter of traffic growth.

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