U.S. Economy Grew 5% in Third Quarter, Its Fastest Rate in More Than a Decade
December 23, 2014, 1:00am

By NELSON D. SCHWARTZ – New York Times.

The American economy grew last quarter at its fastest rate in more than a decade, providing the strongest evidence to date that the recovery is finally gaining sustained power more than five years after it began.

Bolstered by robust spending among consumers and businesses alike, economic output rose at an annual rate of 5 percent during the summer months, the Commerce Department said Tuesday, a sharp revision from its earlier estimate of 3.9 percent. The advance followed a second quarter where growth reached a rate of 4.6 percent after a decline last winter that was exacerbated by particularly harsh weather.

The revision was led by an upswing in investment by businesses, a force for growth in most economic recoveries but one that has lagged in the latest rebound. Higher consumer spending and a healthier trade balance also helped. The gain makes the third quarter the strongest since the summer of 2003.

The upbeat data was welcomed by traders on Wall Street, lifting the Dow Jones Industrial average above 18,000 for the first time.

Although the growth rate is expected to decelerate somewhat in the current fourth quarter, the improved view in the rearview mirror corresponds with other evidence suggesting that the economy is moving to a higher gear.

“The data today is very consistent with a U.S. consumer that is doing quite well,” said Michael Gapen, chief United States economist at Barclays. “Consumers are receiving a boost in the form of lower gas prices but they are also feeling more confident about their own futures because of the stronger labor market.”

In a separate Commerce Department report Tuesday morning, the government reported that personal spending jumped 0.6 percent in November, slightly more than expected, while October’s increase was revised upward by 0.1 percentage point to 0.3 percent. Personal income jumped by 0.4 percent in November, the Commerce Department said, ahead of the 0.3 percent rise in October and the 0.2 percent increase in September.

Unemployment has been steadily falling, and payrolls grew by more than 300,000 last month, a significantly better-than-expected reading. Similarly, consumers have gotten a big boost recently from the steep fall in gas prices since the summer. That is expected to lift holiday retail sales this month.

“Consumption growth appears to have accelerated further in Q4, with plunging gasoline prices shifting upside to more discretionary areas,” Ted Wieseman, an economist with Morgan Stanley, said in a note to clients after the revised figures on economic growth were released.

The only negative indicator amid Tuesday’s flood of economic data was a 0.7 percent drop in durable goods orders in November. But durable goods data, tracked by the Census Bureau, is often highly volatile on a month to month basis, and economists tend to put more weight on other factors like employment, consumer spending and income.

The final Thomson Reuters/University of Michigan survey of consumer sentiment, also released Tuesday morning, recorded a small decrease to 93.6 from a preliminary 93.8 report. That still left overall consumer expectations in the survey are at their best levels since Jan. 2007, a year before the last recession began.

Despite signs of faster growth, the Federal Reserve remains cautious about raising short-term interest rates from near zero, where they have been since the depths of the financial crisis in 2008.

The central bank is expected to raise rates in mid-2015, but signaled last week that it would remain patient in order to confirm that faster growth looks sustainable and will translate into increased hiring over the long term.

The better-than-expected data Tuesday morning prompted some experts to quickly revise their forecasts for growth in the fourth quarter upward. Macroeconomic Advisers, for example, lifted its estimate of fourth quarter growth to 2.8 percent from an earlier forecast of 2.6 percent, while Goldman Sachs bumped its forecast to 2.6 percent from 2.2 percent.