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The US economy reported strong growth in Q3, with headline GDP accelerating to 3.4% (q/q SAAR). Growth was driven by a very strong consumer and exceptionally strong business investment. Indeed, the investment momentum is an AI story – following the data center boom, the structures are now being outfitted with equipment, including everything from IT and electrical equipment to plumbing and HVAC systems, all of which contributed to a record quarter for equipment growth.
And US consumers continued to show resiliency in the face of inflationary pressures, as Q3 consumption rose 3.8%. Some of this strength is attributable to the World Cup which ran through July. But services spending momentum held up through September and remains a key engine of growth in this economy. Low layoffs are another key signal – this is a tight labor market and when consumers have jobs, they spend their incomes. But discretionary spending is growing at a faster rate than non-discretionary, and real services sector spending is still in positive territory while real goods spending is not. This illustrates how the inflation backdrop is exacerbating the K-Shape economy.
Taken together, demand driven inflation is a growing concern and despite the softer core PCE print for September, broad inflation pressures are not going away anytime soon. At 3.6% y/y, core services excluding housing is now running at its highest pace in over two years, and this is in the face of mounting core goods pressures. To be clear: we do not expect that core PCE fully captures spillovers from higher energy costs just yet.
Looking ahead, another inflationary risk worth flagging is the rebound in inventories. Following 5 consecutive quarters of decline, inventories rose in Q3. The risk there stems from timing – most of the drawdown followed a Q1 2025 surge that was largely pre-tariff inventory. This adds cost pressures, increasingly the likelihood that tariffs pressures add to inflation in 2027.
AI buildout continues to drive exceptional growth in equipment investment
Q3 data signals pre-tariff inventories may be largely depleted
About the authors:
Mike Reid is Head of US Economics at RBC. He is responsible for generating RBC’s US economic outlook, providing commentary on macro indicators, and producing written analysis around the economic backdrop.
Carrie Freestone is a Senior US Economist at RBC. Carrie is responsible for projecting key US indicators including GDP, employment, consumer spending and inflation for the US. She also contributes to commentary surrounding the US economic backdrop which she delivers to clients through publications, presentations, and the media.
Imri Haggin is an US Economist at RBC, where he focuses on thematic research. His prior work has centered on consumer credit dynamics and treasury modeling, with an emphasis on leveraging data to understand behavior.
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