Where GDP Growth Came From: Investment Boom Powers U.S. Economy Despite Tech Sector's Import Dependence

A surge in business investment, an increase in inventories, and robust consumer spending drove economic growth in the third quarter, overcoming a massive drag from international trade rooted in the U.S. dependence on tech imports. The Commerce Department reported Thursday that gross domestic product grew at a 3.4 percent annualized rate from July through September, accelerating from the second quarter’s 2.2 percent pace and beating economists’ expectations for 3.1 percent growth. A breakdown of the figures shows that private investment contributed 3.27 percentage points to growth, including 1.78 points from business fixed investment and 1.61 points from increases in inventories. A decline in residential investment, reflecting a slumbering housing market, was a drag on growth. Consumer spending contributed another 2.52 percentage points, nearly identical to its contribution in the second quarter. The strength of domestic demand was partly offset by a sharp deterioration in net exports—basically, exports minus imports—which subtracted 3.32 percentage points from growth. Imports surged at a 19.7 percent annualized rate, subtracting 2.64 points from the GDP calculation. Exports fell at a 5.7 percent rate, subtracting another 0.68 point. Business Equipment Investment Surges The standout feature of the report was the extraordinary strength of business investment, particularly spending on equipment. Nonresidential fixed investment—the catchall category for business spending on structures, equipment, and intellectual property—grew at a 12.7 percent annualized rate, contributing 1.78 percentage points to overall GDP growth. Equipment investment surged at a 20.9 percent rate, accounting for 1.16 percentage points of growth. Computers and peripheral equipment alone contributed 0.72 percentage point, reflecting the enormous scale of spending on computing infrastructure. Other information-processing equipment contributed 0.14 point, while industrial equipment added 0.27 point. Transportation equipment investment declined, subtracting 0.09 point. Investment in intellectual property products, including software and research and development, grew at an 8.4 percent rate and added another 0.47 percentage point to GDP growth. Investment in business structures also rebounded, growing at a 5.4 percent rate after barely increasing in the second quarter. That contributed 0.15 point to overall growth. Residential investment remained a weak spot, declining at a 3.3 percent annualized rate and subtracting 0.12 point from GDP growth. Consumer Spending Remains Strong Consumer spending grew at a 3.8 percent annualized rate for the second consecutive quarter, contributing 2.52 percentage points to economic growth. Spending on services accounted for 1.89 percentage points of the increase, up from 1.57 points in the second quarter. Spending on goods contributed 0.63 point. Among services, health care contributed 0.56 point, while spending on restaurants and accommodations added 0.41 point. Housing and utilities contributed another 0.34 point. Spending on durable goods slowed, contributing just 0.17 point, down from 0.52 point in the second quarter. Spending on nondurable goods contributed 0.47 point. Inventories and Government Spending Add to Growth Changes in private inventories contributed 1.61 percentage points to third-quarter GDP growth, a sharp reversal from the second quarter, when inventories subtracted 0.53 point. Government spending also rebounded, growing at a 5.3 percent annualized rate and contributing 0.90 percentage point to GDP growth after making virtually no contribution in the second quarter. Federal government spending accounted for the entire increase, contributing 0.91 percentage point, while state and local government spending was essentially flat. Defense spending contributed 0.41 point, and nondefense spending contributed 0.49 point. The Commerce Department cautioned that much of the increase in nondefense spending reflected an accounting effect from lower sales of oil from the Strategic Petroleum Reserve. Those transactions are offset elsewhere in GDP calculations and have no direct effect on total economic output. Trade Subtracts More Than Three Percentage Points International trade provided the largest offset to domestic economic strength. The 3.32-percentage-point subtraction from net exports was three times the 1.10-point drag recorded in the second quarter. Imports of goods rose at a 26.4 percent annualized rate. The Commerce Department said capital goods, excluding automobiles, were the largest contributor to the increase. Although imports are subtracted in calculating GDP, the increase also reflects purchases by American businesses and consumers, including equipment used in domestic investment. Much of the imported equipment is also counted in domestic investment. The subtraction of imports from GDP prevents the value of foreign-made equipment from being counted as American production or double-counted in the calculation of economic growth. The figures underscore the strength of domestic private demand even as the trade deficit weighed heavily on the headline growth rate. Real final sales to private domestic purchasers—which excludes inventories, government spending, and net exports—grew at a 4.9 percent annualized rate, accelerating from 4.6 percent in the second quarter and reaching the fastest pace since the second quarter of 2021.