Economists have upgraded their projections for US economic growth in the third quarter, citing stronger expectations for consumer spending and private investment, particularly in the AI sector. The latest monthly survey now puts third-quarter gross domestic product growth at a 2.5% annualized rate, a notable increase from the 2% forecast in the prior poll.
Projections for quarterly GDP through the end of 2027 have remained largely stable, clustering within a tight band of 2% to 2.2%. Inflation expectations through the end of next year have also seen minimal adjustments, with the core personal consumption expenditures price index, which strips out food and energy, forecast to average 3.2% this year before easing to 2.5% for the full year 2027.
As the so-called core PCE gauge signals that inflation is cooling, economists anticipate the Federal Reserve will hold interest rates steady until the end of July next year. "Tech/AI-related investment is a key driver of increased business capital expenditure, while spending by higher-income households accounts for a large share of consumer outlays," noted James Knightley, chief international economist at ING.
Analysts estimate that total AI-related capital spending could surpass $1 trillion this year, potentially exceeding $1.5 trillion by 2027. Furthermore, Knightley added, "Cooling employment and inflation data, combined with the market's view that new Fed Chair Kevin Warsh is less inclined toward rate hikes, have made market pricing less aggressive, with the probability of a September hike now seen at less than 50%."
An escalation of the war in Iran poses a risk to the economic outlook, as it could push oil and consumer prices higher while potentially weighing on growth. With inflation running above the Fed's 2% target, a prolonged supply shock would make the central bank's task more challenging.
Economists have also trimmed their forecast for average monthly nonfarm payroll growth this year to 66,000, with similar monthly gains expected through 2027. The survey, which included up to 85 economists, was conducted from August 14 to 19.
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