GDP Grew 3.4% in the Third Quarter While Inflation Picked Up in September

The economy grew faster than expected, but a jump in September inflation means the Fed has less room to help borrowers and small business owners anytime soon.

The economy grew at a 3.4% annualized rate in the third quarter, better than the 3.1% economists expected and well ahead of the second quarter's 2.2% pace, the Commerce Department reported Thursday. At the same time, inflation picked up in September: the Fed's preferred gauge, the personal consumption expenditures price index, rose 0.5% for the month, the largest monthly increase since March, pushing the annual rate to 3.6%, nearly double the Fed's 2% target. Core PCE, which strips out food and energy, came in at 3.1% annually. Strong growth and hot inflation at the same time is not a combination to cheer without reservation. It means the economy has real momentum, but it also means the Federal Reserve has less room to cut rates and give relief to anyone carrying debt, including small business owners.

Where the Growth Is Actually Coming From

Look past the headline number and the growth is lopsided. Gross private domestic investment soared 19.4% in the third quarter, driven by a 20.9% surge in equipment spending and an 8.4% jump in intellectual property products. The Commerce Department and other outlets tie that directly to AI investment: data centers, chips, software. Consumer spending rose 3.8%, the same pace as the prior quarter, and real sales to private domestic purchasers, a measure the Fed watches for underlying demand, rose 4.9%, up from 4.6%. Meanwhile, initial jobless claims fell to 194,000 for the week ended October 24, below the 200,000 estimate and near levels last seen in the late 1960s. That is a genuinely low number. But low layoffs and strong GDP driven by AI capital spending do not automatically translate into more hiring across the board. A lot of this growth is money going into servers and software, not into payrolls at the kind of small businesses that do most of the hiring in this country.

What Rising Energy Costs Do to a Contractor's Margin

The part of this report that should worry small business owners more than the headline GDP number is energy. Gasoline and other energy goods jumped 9.2% in September, and energy goods and services broadly rose 5.4%. For a home-service contractor, a pressure washer, a lawn crew, a roofer, fuel is not a line item you can push off. Trucks run every day, equipment runs every day, and most contractors quoted their jobs weeks or months before the bill for diesel or gas showed up. In my work with contractors through my marketing company, the ones who survive a stretch like this are the ones who build fuel costs into their pricing with some kind of adjustment clause, not the ones who eat the increase and hope it reverses. The same logic applies on the insurance side. Commercial auto and equipment coverage is priced off replacement costs and claims trends that move with inflation, so a sustained run-up in energy and input costs eventually shows up in renewal premiums too. It takes a few cycles to show up, but it shows up.

Why the Fed Is Stuck Between Jobs and Prices

The Fed voted this week to hold its benchmark rate in a range of 3.75% to 4%, and Fed Chairman Kevin Warsh said plainly that "the period right in front of us is information rich" and that "my colleagues and I are keen to take notice of it." That is a central bank telling you it does not know which way it is leaning next. Growth just came in strong, which argues against cutting rates. Inflation just came in hot, which argues against cutting rates. But low jobless claims and strong headline growth can mask uneven conditions underneath, and if the Fed holds rates higher for longer to fight the energy-driven inflation spike, it is small businesses and anyone financing a new venture who feel it first through the cost of a loan.

What to Watch If You Run a Business or Are Starting One

None of this is a reason to panic, and it is not a reason to assume smooth sailing either. Here is what I would actually be watching if I were running a small business or thinking about starting one right now.

• Watch core PCE, not just the headline number. At 3.1% annually, it is still well above the Fed's 2% target, which is why rate cuts are not guaranteed anytime soon.
• If you run a service business with trucks or equipment, build a fuel cost review into your pricing now rather than after your margin is already gone.
• Low jobless claims are a lagging signal. They tell you who got laid off recently, not who is actually hiring. Treat job postings with the same skepticism.
• If you are financing a new business or an expansion, assume borrowing costs stay where they are for a while. Plan your cash flow around today's rates, not a rate cut that may not come.