US economy expands strongly in Q3, ignoring uncertainty abroad

U.S. economic growth was far stronger than initially thought in the third quarter, pointing to strengthening fundamentals that should support the economy for the rest of the year.

The Commerce Department on Tuesday raised its estimate of gross domestic product to a 3.9 percent annual pace from the 3.5 percent rate reported last month, reflecting upward revisions to business and consumer spending.

Growth had increased at a 4.6 percent rate in the second quarter. The economy has now experienced the two strongest back-to-back quarters of growth since 2003.

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Economists polled by Reuters had expected growth would be cut to a 3.3 percent pace.

Inventories were also revised higher, with restocking now only accounting for a mild drag to GDP growth. That also helped to offset downward revisions to export growth.

A welder works at the Orion Drilling manufacturing and fabrication facility in Corpus Christi, Texas.
Eddie Seal | Bloomberg | Getty Images
A welder works at the Orion Drilling manufacturing and fabrication facility in Corpus Christi, Texas.

Inventories, however, could weigh on growth in the final three months of the year. Spending on residential construction was also revised higher.

It was the fourth quarter out of the past five that the economy has expanded above a 3.5 percent pace. Data ranging from manufacturing to employment and retail sales suggest the economy retained some of that momentum early in the fourth quarter.

The United States remains a bright spot in an increasingly gloomy global economy, with Japan back in recession and growth in the euro zone and China slowing significantly.

The U.S. GDP report also showed corporate profits after tax grew at a 3.2 percent rate in the third quarter, slowing from the second quarter's robust 8.6 percent pace.

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The brisk economic growth pace could boost expectations the Federal Reserve will start raising its short-term interest rate sometime in mid-2015. The U.S. central bank has kept its benchmark lending rate near zero since December 2008.

Underscoring the economy's firming fundamentals, growth in domestic demand was revised up to a 3.2 percent pace in the third quarter instead of the previously reported 2.7 percent pace.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, grew at a 2.2 percent pace instead of the previously reported 1.8 percent rate.

Growth in business investment was raised to a 7.1 percent pace from a 5.5 percent rate, with a stronger pace of spending on equipment than previously thought accounting for the bulk of the revision.

Export growth was lowered to a 4.9 percent rate from the previously reported 7.8 percent rate, while imports were revised up. That left a trade deficit that contributed 0.78 percentage point to GDP growth instead of the previously reported 1.32 percentage points.

Government spending also was cut, as outlays at state and local governments were not as strong as previously reported.