Why was third-quarter growth strong, and why might it slow in the fourth quarter?

  • US real GDP grew at an annualized quarter-on-quarter rate of 3.4% in the third quarter, real business fixed investment grew 12.7%, and real consumption grew 3.8% for the second consecutive quarter. AI buildout drove investment, while wealth effects from rising technology stocks also supported consumption.
  • Consumption grew faster than real income, with a decline in the saving rate as the corresponding arithmetic change. Real consumption was flat month on month in September, and JPMorgan credit card data show weak retail spending growth in October; the bank expects fourth-quarter GDP growth to fall to an annualized quarter-on-quarter rate of 1.75%.
  • Inventories stopped declining after five consecutive quarters of decreases, contributing 1.6 percentage points to third-quarter GDP growth. The ratio of nonfarm inventories to final sales has returned to its level at the end of 2024, but manufacturing inventories are still being drawn down, and there are two possible paths for the duration of subsequent restocking.

How dependent is AI-driven investment growth on a single area?

  • Real equipment investment grew at an annualized quarter-on-quarter rate of about 21% in the third quarter, of which non-tech investment contributed just 1.6 percentage points, down from 8.2 percentage points in the second quarter. Growth was therefore more concentrated in technology-related spending than in the previous quarter.
  • Data centers contributed 6.6 percentage points to growth in nonresidential construction investment, exceeding the overall 5.4% increase in that investment; power facilities contributed another 1.2 percentage points, while manufacturing construction remained a drag.
  • JPMorgan notes that a substantial portion of the equipment involved is produced overseas and that some production processes are highly capital-intensive, so the investment spending may have a relatively limited immediate effect on US employment. The investment outlook is also more dependent on the trajectory of the AI industry itself.

Why is inflation still sticky as wage growth slows?

  • The employment cost index rose 3.4% year on year in the third quarter, with the growth rate unchanged for four consecutive quarters. Wage growth slowed to a cycle low of 3.1% year on year, while benefit cost growth accelerated. Unit labor costs rose 1.4% over the past year, supporting a decline in inflation.
  • JPMorgan expects a tightening labor market and an eventual stabilization in compensation growth to weaken the disinflationary effect of slowing wage growth, keeping core services prices excluding housing particularly sticky. According to the bank's model, a sustained 1 percentage-point increase in employment cost index growth would raise the year-on-year growth rate of that CPI component by about 0.30 percentage points over the following four quarters.
  • The bank expects headline inflation to ease somewhat in late 2027, conditional on lower energy prices, improved supply chains and the end of the pass-through from technology product price increases; however, it expects year-on-year core PCE inflation to remain above 2.5% in the fourth quarter of 2027.

What is JPMorgan's view after the Fed paused rate hikes?

  • At its latest meeting, the Federal Reserve kept the federal funds rate at 3.75%–4.00%, with two committee members favoring a rate hike. JPMorgan believes the post-meeting statement still shows the committee's focus on bringing inflation down further and expects a rate hike at the December meeting.
  • For growth to transition into a more durable expansion, labor income needs to take over from wealth effects. The bank expects nonfarm payrolls to increase by 75 thousand in October, up from 29 thousand in September, and the unemployment rate to fall from 4.2% to 4.1%; at the same time, the flow-consistent unemployment rate indicates the possibility of an increase in unemployment.