US – Strong growth, sticky inflation
US GDP growth came in at 3.4% SAAR in Q3, broadly in line with our forecast. AI-related business investment was the main driver, while consumer spending also remained strong. Underlying private demand was stronger still: final sales to private domestic purchasers, which captures consumer spending and gross private fixed investment, grew by 4.9% SAAR. Trade was a substantial drag on the headline figure, with net imports subtracting 3.3pp from growth, partly offset by a build-up of inventories.
The investment details underline the strength of the AI build-out. Nonresidential fixed investment grew by an impressive 12.7%, led by an almost 21% rise in equipment investment. Within that category, computers and peripheral equipment rose by 67%. Consumer spending grew by 3.8%, with healthcare leading the gains. Hospital and outpatient services were major contributors on the services side, while other nondurable goods, predominantly prescription drugs, supported goods spending. Food services and accommodation also contributed strongly, suggesting that higher-wealth households continue to spend.
The PCE report released alongside GDP broadly fits this picture, although the monthly spending figures were less strong. Headline inflation came in hot at 0.5% m/m, while core rose by 0.3%. Income growth failed to keep pace with inflation, and a decline in the savings rate helped keep real spending flat. Beneath the strong inflation reading, however, pressures continued to narrow. Fed Chairman Warsh’s preferred breadth metric declined further on a 12-month basis, although the six-month measure edged up. As last month, we saw less pressure in typical AI-related categories such as computer software and services. Price pressures in personal computers also eased after two strong months. All told, AI-driven inflation is losing momentum, even if it remains a significant contributor. We continue to expect inflation to come down, but not at sufficient pace to avoid a December hike. Market pricing slightly lowered the odds following the release, but upcoming data and central bank speeches, especially from Jefferson, Waller or Warsh, will likely be more market moving.