The last major economic report before Tuesday’s midterm elections landed Thursday morning, and it delivered two headlines at once. The economy is growing faster than almost anyone expected. Prices are rising faster than the Federal Reserve can tolerate. Both are true, and a serious country has to hold both thoughts at the same time.
According to the Bureau of Economic Analysis advance estimate, real gross domestic product grew at a 3.4% annual rate in the third quarter of 2026 (July through September), up from 2.2% in the second quarter. That beat forecasts: economists polled by Reuters had expected 3.2%, and CNBC reported a consensus of 3.1%. Reuters called it the fastest pace since the third quarter of 2025.
On the same morning, the BEA’s personal income and outlays report showed the personal consumption expenditures (PCE) price index, the Fed’s preferred inflation gauge, up 0.5% in September alone and 3.6% from a year earlier. Core PCE, which strips out food and energy, rose 0.3% for the month and 3.1% over the year. The Fed’s target is 2%.
What drove the growth
The composition of the number matters more than the headline. Consumer spending, which accounts for more than two-thirds of the economy, rose at a 3.8% annual rate, Reuters reported.
The real engine was business investment, much of it tied to artificial intelligence. Equipment spending surged at a 20.9% rate, the fastest since the third quarter of 2020, adding 1.16 percentage points to growth. Spending on intellectual property products such as software grew 8.4%, adding just under half a point. The BEA’s measure of real final sales to private domestic purchasers, consumer spending plus private fixed investment, rose 4.9%, up from 4.6% in the second quarter.
Three other forces shaped the number. Imports jumped at a 19.7% rate and subtracted 2.64 points from growth. Businesses rebuilding inventories added 1.61 points. Government spending rose at a 5.3% rate. Housing went the other way: residential investment contracted.
The labor market remains firm. The Labor Department’s weekly data, summarized by Haver Analytics, showed initial jobless claims of 194,000 in the week ending October 24, with the four-week average at 196,750 and continuing claims at 1.701 million. Employers are not shedding workers in large numbers.
The household squeeze behind the good number
If the economy is this strong, why do so many families feel the opposite? The same government data give a partial answer. In September, inflation-adjusted disposable personal income fell 0.3%, and real consumer spending was flat, according to the BEA. The personal saving rate fell to 3.8%. In plain terms, the typical household’s money bought less in September than in August, and families kept spending by saving less.
NPR reported that much of the consumer strength is coming from higher-income Americans, while wage growth has fallen behind inflation for many others. And with average gasoline prices still above $4 a gallon as the war with Iran continues, energy costs keep hitting the budgets of people who don’t own much stock.
This is the gap between a GDP number and a grocery bill. A 3.4% growth rate is real. So is the fact that, for many working families, prices have been outrunning paychecks.
The Fed has stopped pretending
The day before the GDP report, the Federal Open Market Committee voted 10–2 to hold its benchmark rate at 3.75% to 4%, where it has stood since a quarter-point increase in September. The statement upgraded the economy to “expanding at a strong pace” and said bluntly that “inflation remains elevated.” The two dissenters, Governor Lisa Cook and Cleveland Fed President Beth Hammack, wanted to raise rates by another quarter point.
Chairman Kevin Warsh, at his press conference, noted that first-half growth had been revised up to 2.4% from 1.8%. That was before Thursday’s stronger third-quarter figure. After Thursday’s data, markets were pricing a better than 77% chance of a December rate hike, according to CNBC’s reading of CME FedWatch.
Markets took the day in stride. The S&P 500 slipped 0.3% to 7,720.39 and the Dow fell 0.3% to 52,342.56, while the Nasdaq dropped 1.4% to 26,184.72, the Associated Press reported. The Nasdaq’s slide was led by Alphabet, which suffered its worst one-day drop on record. That is a reminder that the AI investment boom carries real risk as well as promise. The 10-year Treasury yield eased to about 4.96%, CNBC reported, still close to 5%.
What responsible policy looks like now
The conservative case on the economy has always rested on a simple idea: growth is built on sound money, honest budgets and private investment, not on government spending and wishful thinking. Thursday’s report supports that idea from both directions.
The good news is mostly private. Businesses are putting their own capital at risk on equipment and software, and that investment, not federal outlays, is what raises productivity and wages over time. Policy should protect it with predictable tax and regulatory rules, faster permitting for the power plants and transmission lines data centers need, and trade policy that does not swing from week to week.
The warning signs are mostly public. A 5.3% jump in government spending is not a sign of health in an economy the Fed itself describes as “expanding at a strong pace” with inflation still “elevated.” When Washington adds demand to a hot economy, it makes the Fed’s job harder and pushes interest rates higher for everyone with a mortgage, a car loan or a credit card balance. Fiscal restraint is not austerity for its own sake. It is the cheapest anti-inflation tool available.
The Fed, for its part, should do what its statement promises: bring inflation back to 2% without political pressure in either direction. An independent central bank that raises rates when the data call for it is not an enemy of working families. Persistent 3% to 4% inflation is.
Finally, candidates in both parties should be honest with voters. Republicans should not wave away the household squeeze because the headline number is strong. Democrats should not pretend the economy is collapsing when it plainly is not. The truth is less convenient for both: the economy is growing, inflation is too high, and the fix requires discipline from Congress and the Fed alike.
One caution applies to everything above. This is an advance estimate, built on incomplete data, and the BEA will revise it twice. The next personal income and inflation report is due November 25. But the direction is clear enough to act on. Strong growth is a gift. Squandering it on deficits and tolerating inflation would be a choice.
