The U.S. economy grew solidly in the third quarter, with consumer spending increasing at its fastest pace in 1-1/2 years and inflation slowing sharply, continuing to defy forecasts of a recession and outperforming its global peers ahead of the Nov. 5 presidential election.

The Commerce Department’s advance estimate of third-quarter gross domestic product on Wednesday also showed robust business investment in equipment last quarter.

The report was published less than a week before Americans head to the polls to choose Democratic Vice President Kamala Harris or Republican former President Donald Trump as the country’s next president.

Polls show the race is a toss-up, with the health of the economy the top priority for voters, who have grumbled about high food and housing costs. The economy has stayed resilient despite 5.25 percentage points of interest rate increases in 2022 and 2023 from the Federal Reserve to tame inflation.

“The economy is firing on all cylinders and unless there is a large external shock or domestic policy error, it is poised to close out the year on a strong note,” said Joe Brusuelas, chief economist at RSM.

Gross domestic product increased at a 2.8% annualized rate last quarter the Commerce Department’s Bureau of Economic Analysis said. Economists polled by Reuters had forecast GDP would advance at a 3.0% pace.

The slight miss reflected a widening of the trade deficit as businesses boosted imports to satisfy robust demand, while inventory accumulation was pared back.

The pace of expansion was well above what U.S. central bank officials regard as the non-inflationary growth rate of around 1.8%. A measure of domestic demand that excludes government spending, trade and inventories increased at a 3.2% rate compared to the 2.7% pace logged in the second quarter.

The economy grew at a 3.0% pace in the April-June quarter.

The BEA said it was impossible to estimate the impact of Hurricane Helene, which devastated large areas of the U.S. Southeast in September, noting that the destruction of fixed assets, such as residential and nonresidential structures, did not directly affect GDP or personal income.

It, however, estimated that Helene resulted in losses of $39.0 billion in privately-owned fixed assets and $2.0 billion in state and local government-owned fixed assets.

The report added to annual revisions published last month that indicated the economy was much stronger than had been previously estimated. The revisions almost erased the gap between GDP and gross domestic income, an alternative measure of growth, through the second quarter.

Prior to the revisions, some economists had argued that gap suggested economic activity was being overestimated.

Consumer spending, which accounts for more than two-thirds of economic activity, grew at a 3.7% pace. That was the fastest rate since the first quarter of 2023 and was up from the 2.8% pace notched in the second quarter. It added 2.46 percentage points to GDP growth, the most in 1-1/2 years.

Spending was boosted by outlays on both goods and services, including prescription medication, motor vehicles, doctor visits as well as dining out and hotel and motel stays.

Consumption is being underpinned by a resilient labor market as well as a rise in household net worth, thanks to a stock market boom and higher house prices. Personal income increased $221.3 billion last quarter, with wages accounting for the rise. That followed a $315.7 billion gain in the April-June quarter. The saving rate fell to 4.8% from 5.2% in the second quarter.

Economists were unfazed by the moderation in income growth, noting a recent pattern of the data being revised sharply higher. There are, however, concerns that growth is mostly being driven by middle- and upper-income households, which have more flexibility and substitutability of consumption. A moderation in spending from the third quarter’s robust pace is expected.

“Households continue to face their fair share of challenges with still-high prices at the top of the list, but that doesn’t appear to be deterring them from spending,” said Jay Bryson chief economist at Wells Fargo.

Stocks on Wall Street were trading higher. The dollar fell against a basket of currencies, as did U.S. Treasury prices.

Inflation subsiding

But inflation has cooled down significantly, offering relief for households, especially lower-income families.

The price index for gross domestic purchases, which measures inflation in the U.S. economy, advanced at a 1.8% rate. That was the smallest gain since the fourth quarter of 2023 and followed a 2.4% rate of increase in the second quarter.

The personal consumption expenditures price index excluding the volatile food and energy components, which is followed closely by the U.S. central bank, rose at a 2.2% rate. That was the smallest rise in core inflation in nearly a year and a sharp deceleration from the 2.8% pace in the April-June quarter.

The slowdown in inflation toward the Fed’s 2% target has allowed the central bank to ease policy. Last month it kicked off that cycle with an unusually large half-percentage-point rate cut, the first reduction in borrowing costs since 2020. The Fed’s policy rate is now set in the 4.75%-5.00% range.

Economists did not expect the strength in domestic demand to deter the Fed from cutting rates again next week and in December. But they cautioned that the trend, if sustained, could steer the central bank to a more gradual policy easing path than it signaled last month.

Much will depend on the labor market. Economists expect job growth took a big step back in October, restrained by a strike at Boeing as well as Helene and Hurricane Milton, which slammed Florida early this month.

“If the data continues to come in stronger than anticipated, however, the Fed could start floating trial balloons about the possibility of skipping a rate cut in December,” said Ryan Sweet, chief U.S. economist at Oxford Economics.

Business spending on equipment surged at a 11.1% rate, the quickest since the second quarter of 2023, powered by the aircraft category. Investment in software, however, slowed. Outlays on structures, such as factories, declined.

Government spending accelerated, boosted by defense outlays.

But the pace of inventory accumulation slowed to a $60.2 billion rate from a $71.7 pace in the second quarter, and subtracted 0.17 percentage point from GDP. The trade deficit widened amid rising imports, which were also likely driven by businesses front-loading merchandise in anticipation of higher tariffs and a dockworkers strike that proved to be short-lived.

Residential investment, which includes homebuilding and sales, contracted for a second straight quarter.

Economists expect the Boeing strike and hurricanes to curb growth in the fourth quarter, with the outcome of the election next week shaping the outlook for 2025.

“We anticipate a modest deceleration in GDP growth,” said Steve Rick, chief economist at TruStage. “Potential shifts in policy next year could impact taxes, government spending and regulation.”

—Lucia Mutikani, Reuters