According to a report, on Thursday the U.S. Bureau of Economic Analysis (BEA) under the Commerce Department delivered two reports at once: the advance estimate of third-quarter real GDP rose at an annualized rate of 3.4%, above economists' forecast of 3.2% and the prior reading of 2.2%; the September PCE price index rose 0.5% month-on-month and 3.6% year-on-year, while core PCE, excluding food and energy, rose 0.3% month-on-month and 3.1% year-on-year — all four figures landing within market expectations.
Looking first at the GDP breakdown (all annualized quarter-on-quarter): personal consumption expenditures grew 3.8%, holding that pace for a second consecutive quarter; business investment rose 12.7%, the strongest since 2020, with both information-processing equipment and industrial equipment posting large gains; the contribution of equipment spending to GDP hit the highest level since 2011 — excluding the post-pandemic rebound period; net exports dragged 3.3 percentage points, the largest drag since early last year; inventories contributed 1.6 percentage points; residential investment continued to be a drag, after mortgage rates briefly climbed to 7.5%.
Turning to September income and spending: personal income rose by $54.5 billion, up 0.2% month-on-month (market expected 0.3%), disposable personal income rose by $52.7 billion, up 0.2%, but real disposable income fell 0.3%; personal consumption expenditures rose by $113.1 billion, a nominal increase of 0.5% (market expected 0.6%), while real spending rose only $2.6 billion, less than 0.1% — essentially zero; personal savings stood at $911.1 billion, and the savings rate fell to 3.8%.
On the inflation side: the PCE price index rose 0.5% month-on-month (0.3% in August) and 3.6% year-on-year (3.4% in August); core PCE rose 0.3% month-on-month and 3.1% year-on-year, the highest since May, versus 3.0% in August.
AI equipment investment and inventory restocking made this quarter's growth structure highly concentrated. The contribution of equipment spending to GDP reached its highest since 2011, and this portion fell heavily on information-processing equipment — that is, the kind of investment tied to AI data centers. The 12.7% growth in business investment was the strongest since 2020. In other words, strip out AI-related spending and this quarter would be nowhere near as hot as 3.4%.
The 3.3-percentage-point drag from net exports looks contradictory but shares the same root: the massive equipment on which AI investment depends must be imported, and the surge in imports of data-center equipment itself depressed net exports; on top of that, companies pulled forward shipments to avoid tariffs, pushing the import side even higher. The 1.6-percentage-point contribution from inventories likewise carries a one-off flavor — goods rushed in will eventually have to be worked off in later quarters. And residential investment, shrinking under a 7.5% mortgage rate, was the only uncontested drag in this report.
This also explains the severe divergence between the data and how things feel: the GDP reading was one of the strongest in three years, yet consumer confidence as measured by the University of Michigan and the Conference Board sits at historic lows, and Trump's approval rating is at a low for his tenure — and this report was released less than a week before the November 3 midterm elections. Some economists are blunt: given the growing weight of AI-related spending, 3.4% may not be the true picture of the economy.
The real problem lies in consumption: the divide between nominal and real. Even more alarming than the GDP components is the crack in the September income and spending accounts. Nominal spending rose 0.5%, while real spending was roughly zero; nominal income rose 0.2%, while real disposable income fell 0.3%. Income growth has fallen to its lowest range since April 2022, yet consumption is still growing, and the gap can only be filled by savings: the savings rate was 4.6% in July (revised), 4.1% in August (the lowest since November 2022), and fell further to 3.8% in September.
There is also a timing mismatch that must be pointed out: GDP covers July through September, while real consumer spending in September had already stalled. In other words, 3.4% is a rearview mirror, while zero growth is the current reading — the strong momentum of the third quarter had already lost its接力 from the consumption side as it entered the fourth quarter.
And the pressure is still mounting. The average U.S. gasoline price remains above $4 per gallon; gasoline and other energy commodity prices rose 9.2% month-on-month in September (4.4% in August), and energy spending rose in six of the first nine months of the year. Observations from the corporate side also point to divergence: United Parcel Service CEO Carol Tomé said on this week's earnings call that as long as employment remains stable, "consumers will spend because they have assets," but she also stressed that those without assets are already struggling; Coca-Cola said households across income levels are prioritizing "value."
The previously released September retail sales total beat expectations, which is easily read as "consumption remains strong." Break down the structure and the conclusion is far more cautious. First, the 0.8% increase depended heavily on the single category of gas stations. Strip that out and only 0.2% remains; strip out autos, building materials, and food services as well and only 0.1% remains. Retail data is seasonally adjusted but not inflation-adjusted, and if September's 0.6% monthly price increase is factored in, real retail sales were "flatter than flat." Second, real purchasing power is declining. Reports note that inflation-adjusted wages fell again in September; the reason consumers are still spending is largely high-income households supported by stock gains — the so-called K-shaped economy. The Fed's Beige Book released on Wednesday confirmed this: from late August to early October, most districts reported consumer spending "changed little or not at all"; even in a district like Dallas where businesses reported solid retail sales, there were "some reports of more cautious spending by lower-income customers."
Inflation: energy is pushing the headline, and the core is also picking up. The headline PCE year-on-year rate rebounded from 3.4% to 3.6%, almost entirely attributable to the energy component. But that is not the whole story. Core PCE year-on-year rose from 3.0% to 3.1%, the highest since May; and in the August data, "supercore" services inflation excluding housing costs had already reaccelerated. This means that even if statistical adjustments reduced the weight of some goods prices, domestic price pressure on the services side has not disappeared. Middle East conflict and the Russia-Ukraine war have pushed up fuel prices, and the Trump administration's tariffs have raised prices for some goods; both lines are feeding into the core.
This report means PCE has now been above the Fed's 2% target for 68 consecutive months — inflation has been too high for nearly six years.
The Fed: A December hike is already priced in, with disagreement focused on 2027. On October 28 the Fed held rates steady by a 10-2 vote, with the two dissents coming from Governor Lisa Cook (her first dissent in her tenure) and Cleveland Fed President Beth Hammack, both of whom favored a 25-basis-point increase. The Fed had just hiked once in September, the first time in three years.
Three signals are worth noting: the statement upgraded its description of economic activity from "solid" to "expanding at a strong pace," while reiterating that "inflation remains elevated"; Chair Kevin Warsh said at the press conference that "economic activity is expanding at a strong pace" and "domestic spending remains resilient," and said the next six weeks would be an "information-dense" period; he also explicitly rejected forward guidance, announcing that starting in 2027, one of the FOMC's eight annual meetings will be converted into a pure strategy discussion, with no rate vote and no policy statement.
It should be noted that the 3.4% growth rate is clearly above the roughly 2% "non-inflationary growth rate" that some Fed officials believe in. CME's "FedWatch" showed that after the decision, the probability of a 25-basis-point hike in December briefly rose to 85.0% (78.3% the previous day), and remained near 81% after the GDP and PCE releases. Institutional disagreement is concentrated on 2027: Kay Haigh, global head of fixed income and liquidity solutions at Goldman Sachs Asset Management, expects the Fed to resume hiking in December and possibly tighten further next year if energy prices rise again or data remain strong; former Philadelphia Fed President Patrick Harker expects a 25-basis-point hike in December followed by no action in 2027; and Ian Lyngen of BMO Capital Markets believes a third hike after December may not be necessary. The tail risk was raised by Brent Schutte of Northwestern Mutual: if October inflation prints another hot reading similar to that month's, the market will begin to question the Fed's commitment to its 2% target, and a 50-basis-point hike may be needed in December.
Political constraints also exist. Inflation and the cost of living are core issues in this election campaign, and the November 3 midterm elections will determine control of Congress, including oversight of the Fed. Holding steady before the election both avoids being interpreted as political interference and leaves time to observe data; but once the election passes, that constraint disappears.
Impact on U.S. stocks: earnings are the support, and AI cash flow is being repriced. Recently, a chip chain running from equipment to foundry to memory to finished machines fell in unison, showing that the market is cutting the same variable — not demand, but the money that supports demand. Now, what the market hears is not "demand is good," but "good demand must first turn into a bill." This is exactly the narrative shift in this round of AI trading: over the past two years, whoever confirmed orders rose; now, whoever confirms spending falls.
At present, what is weighing on U.S. equity macro sentiment is not a demand problem but a financing problem. Alphabet's third-quarter revenue was $127.58 billion, up about 25% year-on-year, but below analysts' estimate of $128.2 billion; more striking was free cash flow of negative $9.07 billion, negative for a second consecutive quarter and the first time since its listing, with the stock falling more than 11% at one point premarket. Microsoft's quarterly revenue was $92.28 billion, up 19%, with Azure growing 48%, but full-year capital expenditure was about $170 billion. The AI capex narrative is shifting from "story" to "cash flow" — this is the micro foundation for Nasdaq futures falling far more than the Dow.
In premarket trading, the AI hardware chain fell broadly: Marvell Technology dropped more than 12% (on news that it is in talks to buy data-center optics maker Lumentum), CoreWeave fell more than 6%, and Intel, Seagate, and ARM fell more than 3%.
Support does exist. LSEG data show that of the 200 S&P 500 companies that have reported third-quarter results, 84% beat market expectations, and the expected overall year-on-year earnings growth rate has been revised up from 30.6% on October 1 to 31.8%. In a high-rate environment, earnings are the main support for U.S. stocks to absorb valuation pressure. Parth Talsania, CEO of Equisights Research, put it most precisely: this selloff is "an interest-rate event dressed in credit clothing," and CoreWeave is the "most leveraged" specimen of this rate pressure, not "the first evidence of a crack in AI demand"; "companies that collect cash are protected."
Treasury yields remain elevated. The 10-year Treasury yield closed at 5.021% on October 28, having briefly broken above 5.3% earlier in the month, a 24-year high; the 2-year yield fell below 4.7% during Warsh's press conference. The combination of a falling short end and a rising long end has a clear meaning: the market is cutting near-term hike bets, while the long end above 5% reflects not "how many more hikes" but term premium, Treasury supply, and sticky inflation. In other words, "the Fed not hiking" has not truly eased valuation pressure on stocks — the pressure comes from the long end. Mike Medeiros of Wellington Management warned that Warsh is dovish overall but contradictory in his communication, meaning term premium could reaccelerate upward at some point after the midterm elections.
Three potential judgments. First, the 3.4% is not solid enough, but it is enough to stop the Fed from pivoting. Growth was propped up by AI equipment investment (the highest contribution since 2011) and one-off inventory restocking (1.6 percentage points), while net exports dragged 3.3 percentage points and residential investment kept shrinking; strip out AI and the economy is far cooler than the reading. But what the Fed sees is "demand not cooling + supply hit," precisely the combination least supportive of a policy pivot.
Second, inflation cannot be accounted for by energy alone. In the headline 3.6%, energy commodities at 9.2% month-on-month were the main driver; but core rising from 3.0% to 3.1%, and supercore services having already reaccelerated earlier, show that pressure is transmitting into domestic prices. Being above target for 68 consecutive months is itself a policy credibility problem.
Third, for assets, direction is determined by long-end rates and AI cash flow, not by this hike. The 83% probability of a December hike is already fully priced, so the marginal shock is limited; the real variables are two — whether the 10-year Treasury yield can hold below 5%, and whether tech giants can turn AI capex into free cash flow. Google's negative $9.07 billion free cash flow is a signal.
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