Yeah, 3 oz of extract isn’t going to work… has to be a typo. 3 pounds in a 2.5 gallon batch would yield closer to the OP’s starting gravity of 1.040.1.65 ounces of LME, or 1.65 pounds? If there's only 1.65 ounces of malt extract and everything else is steeping grains then the problem is that there isn't anything for the yeast to ferment.
Edit: was typing at the same time as reply above.