Q3 Economic Indicators: The zeal of the convert

Key Findings from Pacharbor Capital Group’s Indicators:

• GDP / Real Final Sales: Underlying US economic growth is running at a 2.4% annualized pace entering Q4.
• Corporate Revenue: US corporate revenues continue to grow at an annual rate of 6% (nominal), largely unchanged from Q2 2026.
• Corporate Spending: Business investment rose at a 13.9% annualized rate, led by AI-related capital expenditures and enterprise IT spending.
• Industrial equipment orders (ex-energy): Growth in new industrial orders softened to 1.8% annualized, down from 3.8% over the prior three months.
• Private Residential Construction: Real private construction spending declined 1% compared with year-ago levels.
• Prices Paid / Prices Received: Energy inflation was up 39% annually on fuel expense; Services Less Shelter: up 2.3%; Durables: up 1.1%.

Table 1: September 2026 data table

In Q3 2026, the consensus abandoned its “late cycle” slowdown narrative (Forecasters See Lower Growth in 2026) in favor of “reacceleration” (Forecasters Predict Higher Near-Term Growth). Our Q2 2026 data missed the slowdown and the September results released last week didn’t detect much acceleration.

Since April, estimates derived from more than 2,000 monthly portfolio company key performance indicators (KPIs) have been consistent with US GDP growth in a narrow 2.2% to 2.4% range (we estimate final demand, which nets out inventory accumulation or destocking). Recent talk of “renewed strength” and upward revisions to growth forecasts looked more like a change in that narrative rather than a genuine shift in fundamentals (Figure 1). In some respects, the risks to growth have increased since Q2 2026, with a deceleration in industrial orders and further weakening in fixed residential investment.

Figure 1: Nearly six months of stable growth

As a discipline, economics is a strange combination of analytical math, statistics, and storytelling. The last piece seems to have the most resonance with markets but also tends to be the most fickle. Having abandoned previous calls for multiple rate cuts amid a slowing economy, many analysts fervently embraced a new creed: the economy is so strong that much tighter monetary policy is required to slow growth to levels consistent with price stability. Forward interest rates raced higher as analysts began calculating how high rates might need to go to achieve the required demand destruction.

Though markets have focused on the bond market sell-off, most of the move in rates occurred at the front end of the curve (Figure 2). In the month following Chairman Warsh’s address at Jackson Hole, yields on 10 and-30-year Treasuries rose by 57 and 37 basis points, respectively, but the policy-sensitive two-year Treasury yield shot up by 72 basis points. The shift in Fed tone interacted with the new “acceleration” narrative to price more rate hikes than were ever likely to arrive. (At its 4.92% peak, the two-year yield offered cumulative interest that would have required eight hikes to match in money markets over the next two years).

Figure 2: Repricing led by the policy-sensitive front end

Frantic efforts to divine the message sent by bond markets amid this repricing (Stronger growth? Fiscal worries? Debasement!?) offered faux intellectualization for a market structure issue. Over the past several years, government bond markets have experienced a dramatic churn in clientele, with central banks, foreign currency reserve managers, and insurers displaced by leveraged hedge funds and other price-sensitive investors (Have critics focused on the wrong credit boom?). These buyers are more inclined to sell bonds in response to higher short-term interest rates (funding leg sensitivity) and charge a higher price for the risk of further upward moves. When coupled with the growth in the outstanding volume of debt, this new class of investors has left bond markets more fragile and sensitized to front-end repricing.

The Fed, rates markets, and some elected officials’ dream of sub-3% base rates always seemed out of step with our data (A monetary lapse of reason). But the recent Damascene conversion seemed similarly inapt. Two more Fed hikes over the next six months (roughly 4.5% base rates) should take policy to levels more consistent with its price stability and employment goals.

The two sides of AI growth coin

AI shipments and backlogs have now reached record highs every month over the last two quarters. Growth in enterprise IT spending also remains exceptionally strong (+33.6%), but its trajectory has flattened relative to the step function increase observed from Q3 2025 to Q2 2026 (Figure 3). The initial growth in IT budgets mainly came from the adoption of AI services, but outlays quickly rose above expectations due to contractual changes that replaced per-seat licenses with usage-based pricing. Many companies responded this quarter with policies to optimize token consumption. So while we see no signs of a slowdown in AI-related capex, we do expect that year-over-year growth in enterprise IT spending may moderate from current levels in Q4 2026.

Figure 3: Two sides of AI spend coin