US economy on a roll as third-quarter growth revised higher

WASHINGTON – The U.S. economy grew even faster in the third quarter than initially thought, posting the strongest six months of growth in more than a decade and pulling further ahead of other big economies of the world.

The gross domestic product, the country’s total output of goods and services, expanded at a healthy 3.9 per cent annual rate in the July-September period, the Commerce Department reported Tuesday. That’s a notable jump from its first estimate of 3.5 per cent. The revision was propelled higher by more robust consumer and business spending.

Together with a 4.6 per cent surge in the spring, the country has recorded its biggest back-to-back quarterly performance since 2003.

“The question of whether the economy is accelerating or will accelerate is no longer a question; we can say somewhat definitively that the economy has already accelerated,” said Dan Greenhaus, chief strategist at BTIG, in a research note.

In contrast, other advanced economies are struggling.

The eurozone economy barely grew in the third quarter, and inflation is a mere 0.4 per cent, raising concerns of deflation. Japan unexpectedly found itself back in recession in the July-September period. And momentum in emerging economies like China and Brazil is also shaky.

Tuesday’s data further pushes the world’s biggest economy “onto a different page than Europe and Japan,” said Jennifer Lee, senior economist at BMO Capital Markets.

Fueling third-quarter growth was consumer spending, which accounts for 70 per cent of economic activity. That climbed at a 2.2 per cent rate in the three-month period, an improvement from an initial estimate of 1.8 per cent. Business investment in equipment shot up at a 10.7 per cent rate, revised up from 7.2 per cent.

GDP has been on a roller coaster this year. It started with a steep slide in activity in the first three months of the year when the economy contracted at a 2.1 per cent rate, largely due to a severe winter.

Analysts believe momentum could decelerate to around 2.5 per cent in the current quarter but then pick up again in 2015. They expect growth of around 3 per cent, representing a sustained acceleration in activity six years after the Great Recession.

Since the recession ended in June 2009, growth in the U.S. has averaged at subpar rates just above 2 per cent. The lacklustre recovery has been blamed on the financial crisis and the severity of the recession. Such downturns are usually harder to recover from because it requires repairs to the banking system to get credit flowing again.

But economists believe 2015 will be the year when the recovery shifts into a higher gear, in part because they expect the government itself to help. Government spending grew at a 4.2 per cent rate in the third quarter, the strongest performance since the spring of 2009. The gain was bolstered by a 16 per cent surge in defence spending.

The optimism is being fueled by modifications in government budget and tax policies. Across-the-board cuts in government spending and tax increases approved to control huge budget deficits had been holding back growth. By next year, economists believe a better budget picture will begin to pay off and fuel growth.

Meanwhile, an improving job market is expected to provide households with more income, boosting consumer spending. The sharp drop in oil prices should also put more money in Americans’ pocketbooks as they spend less at the pump.

To be sure, weakness overseas and another possible recession in Europe may still hamstring U.S. growth. Those concerns rattled financial markets earlier this fall. But stocks have since rebounded to new highs amid signs that central banks in Europe, Japan and China will take action to bolster growth.

The U.S. economy is also relatively insulated from overseas weakness since exports account for less than 14 per cent of U.S. activity, one of the lowest such shares in the world.

The Federal Reserve in October ended purchases of bonds aimed at pushing long-term interest rates down, though language used by the Fed shows that it does not expect to begin raising short-term interest rates for a “considerable time.” Many economists believe the Fed’s benchmark short-term rate, which has been at a record lows near zero for six years, won’t start rising until the middle of next year.