The economy that the Federal Reserve declined to tighten on Wednesday turned out to be running hotter than almost anyone forecast. Two separate government releases Thursday morning showed output accelerating and layoffs scarce — and handed the Fed's hawks fresh ammunition for a December increase.
Real gross domestic product grew at a 3.4% annual rate in the third quarter, the Bureau of Economic Analysis said in its advance estimate, up sharply from 2.2% in the second quarter. The Federal Reserve Bank of Atlanta's GDPNow model had pointed to 3.3%, and most forecasters surveyed were closer to 3.0% to 3.2%.
Separately, the Labor Department reported that initial claims for unemployment benefits fell to 194,000 in the week ending October 24, a decrease of 1,000 from the prior week's revised 195,000. The four-week moving average slipped to 196,750. Continuing claims dropped 21,000 to 1,701,000, holding the insured unemployment rate at 1.1%.
The Growth Came From Inventories and Equipment
The composition matters more than the headline. BEA attributed the acceleration primarily to a pickup in investment and an upturn in government spending, partly offset by a downturn in exports. Within investment, the largest gains came from private inventory investment — led by wholesale trade and manufacturing, both driven by nondurable goods — and from equipment.
Inventory building is the least durable kind of growth, because stockpiles that rise one quarter often subtract the next. A cleaner read on underlying demand is real final sales to private domestic purchasers, which combines consumer spending and private fixed investment. That measure rose 4.9%, up from 4.6% in the second quarter — still strong, but a far smaller acceleration than the headline implies.
The Inflation Numbers Cut the Other Way
Buried in the same release was data that complicates the hawkish case. The PCE price index rose at a 2.1% annual rate in the third quarter, down from 5.0% in the second. Excluding food and energy, the core measure rose 2.5%, down from 3.3%. The broader price index for gross domestic purchases rose 3.0%, against 5.6% the prior quarter.
Those are quarterly annualized rates, not the year-over-year figures the Fed cites in its statements, and a single quarter can be distorted by the tariff-driven price spikes that inflated the second-quarter readings. But a quarter in which growth accelerated while the Fed's preferred price gauge halved is not an obvious argument for tightening. The policy statement a day earlier had said flatly that "inflation remains elevated."
Labor Market: Low Firing, Low Hiring
The claims data describe an economy where almost no one is being laid off and not many people are being hired. Applications have stayed at or below 200,000 for seven straight weeks and have not topped 230,000 in any week this year, the Associated Press reported.
Hiring is the weak link. Job creation has averaged roughly 68,000 a month this year, including just 29,000 in the latest month — though that still beats 2025's average of about 9,700. The Labor Department's October payrolls report, due November 6, is expected to show around 55,000 jobs added, according to FactSet's survey of forecasters.
Markets and the December Question
Traders read the morning as hawkish on balance. December hike odds on CME's FedWatch tool were quoted between roughly 78% and 87% across outlets on Thursday — a spread wide enough that any single number should be treated as one snapshot rather than the market's view. The 10-year Treasury yield hovered just under 5%, and gold fell about 1% to test support near $4,025 to $4,035 an ounce before recovering toward $4,056.
Equities had a competing story to digest. Alphabet's first top-and-bottom-line miss in nearly four years — $2.67 in adjusted earnings per share against $3.02 expected, on revenue of $127.58 billion versus $128.22 billion — sent the shares down about 10% and dragged Nasdaq futures lower before the open. The indexes had closed Wednesday with a third straight gain, the S&P 500 at 7,743.98, the Dow at 52,475.10 and the Nasdaq at 26,549.85.
Not everyone thinks the Fed has time. "There is a reasonably large camp developing that are concerned about the risk of the Fed falling behind the curve," wrote Thomas Ryan, senior North America economist at Capital Economics, who expects two more increases. Others cautioned against reading the growth print as an inflation signal. "The economy is on fire right now," said Jamie Cox, managing partner at Harris Financial Group, who added that "some people are conflating inflation for growth at the moment."
The next real test arrives with the monthly PCE inflation report and the October jobs report on November 6 — both landing before the December 9 decision.
Sources: Bureau of Economic Analysis, "GDP (Advance Estimate), 3rd Quarter 2026" (BEA 26-45); U.S. Department of Labor, Unemployment Insurance Weekly Claims, October 29, 2026; Associated Press (Paul Wiseman); CME FedWatch; Capital Economics; Harris Financial Group; Yahoo Finance; Federal Reserve FOMC statement, October 28, 2026.