Service sector drove stronger-than-expected summer GDP growth

The updated (and delayed) gross domestic product estimate for the third quarter was released Thursday morning by the Bureau of Economic Analysis.

Real GDP increased at an annual rate of 4.4% across July, August, and September. That’s stronger than the initial estimate — and better than the second quarter's 3.8%. Drill down into the data, and one of the big contributors to strong growth is private-sector services: Think finance, insurance, and tech.

Cornell trade economist Eswar Prasad said he’s one of the reasons why the tech industry is adding to GDP growth. He spends a lot of time analyzing giant data sets to understand what’s happening in the financial markets, and writes computer code to do his analysis.

Last year, he bought subscriptions to a couple artificial intelligence services: ChatGPT and Claude. 

Now, he throws his data sets in there, and has the AI write the code or check his for errors. 

“It frees me up to do my work as an academic in a much better way … and think a little more,” he said. “Rather than spend my time mucking around with the data.”

In other words, Prasad bought products of the information services industry — which was the leading contributor to GDP growth in the third quarter.

“Many of us are now signing on to and subscribing to AI services, probably is what is happening here,” he said.

Another growth area? Insurance. 

Economist Mike Skordeles at Truist said the cost of home repairs has gone way up in the last six years. And now, the cost to insure a home is catching up.

“All the materials are more expensive. The labor is certainly more expensive,” he said. “The cost of insuring it is more expensive.”

Another thing that happened in the third quarter? Mortgage rates started to fall.

Scott Anderson, chief U.S. economist for BMO Capital Markets, said that led more people to refinance their homes.

“Consumers want to take advantage of the lower mortgage rates to refinance and tap some of that equity in their homes,” Anderson said.

This was a win for the financial services industry, which also contributed to growth. 

Also, Mike Skordeles at Truist said companies that had been sitting on the sidelines during the tariff onslaught last spring, finally felt ready to make some deals. This also benefitted the banks. 

“If we're thinking about buying another company or we're divesting a particular business line … companies started feeling more comfortable to say, ‘All right, yeah, let's go forward with that,’” he said.

Also, service industries haven’t been hit by tariffs as much as, say, manufacturing has, said Scott Anderson at BMO.

He said the strength of the service sector is one big reason we’re not in a downturn. 

“We aren't goods producing a country anymore, right?” Anderson said. “Despite all the focus this year on goods and bringing manufacturing jobs back home.”

Two other reasons we’ve stayed out of a downturn? Consumers who keep on spending, and tech companies that keep on investing in AI infrastructure, Anderson said.