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U S Economy
U.S. Economy Grew 5% in Third Quarter
From the Wall Street Journal of Tue, 23 Dec 2014 10:21:48 EST

The U.S. economy posted its strongest growth in 11 years during the third quarter, supported by robust consumer spending and business investment.

Gross domestic product, the broadest measure of goods and services produced across the economy, grew at a seasonally adjusted annual rate of 5% in the third quarter, the Commerce Department said Tuesday. That was up from the second quarter’s growth rate of 4.6% and the strongest pace since the third quarter of 2003, when GDP grew at a 6.9% pace.

The agency last month had estimated third-quarter GDP growth at 3.9%. Economists surveyed by The Wall Street Journal had expected a smaller upward revision, to 4.3% growth.

Tuesday’s report showed stronger-than-expected spending by U.S. consumers, particularly on services like health care. Fixed nonresidential investment also was revised up, signaling more spending by businesses on new buildings and research and development.

“There is a positive feedback loop going on at the moment,” Mike Jakeman, global analyst for the Economist Intelligence Unit, said in a note. “Job creation is running at the strongest rate for 15 years. More people in work means more income, which means more private spending, which means more business investment, which means more hiring.”

The jump in growth was less dramatic on an annual basis. Economic output in the third quarter climbed 2.7% from a year earlier, up from 2.6% growth in the second quarter.

U.S. stocks rose sharply after the report was released Tuesday morning, with the Dow industrials topping 18,000 for the first time.

The Commerce Department also revised upward its estimate of corporate profits last quarter. Corporate profits after tax, without inventory valuation and capital consumption adjustments, rose 2.8% from the second quarter, versus an earlier estimate of 1.7% growth. Profits last quarter rose 5.1% from a year earlier.

The U.S. economy has experienced robust growth since the spring, recovering from the first quarter’s unexpected—but fleeting—GDP contraction. The nation has seen its best year of hiring since 1999. Those signs of strength stand in contrast to worries about a slowdown in other parts of the world, including China, Japan and members of the eurozone.

Still, the weak first quarter will weigh on full-year growth in the U.S., and many economists expect somewhat slower growth in the fourth quarter. Federal Reserve policy makers expect GDP growth of 2.3% to 2.4% in 2014, and a pickup next year to growth of 2.6% to 3%, according to projections released last week.

The Commerce Department will release its first estimate of GDP in the fourth quarter, which ends next week, on Jan. 30.

In the rear-view mirror, though, the U.S. economy looks stronger than it has in more than a decade.

The third quarter saw consumer spending rise at a seasonally adjusted annual rate of 3.2%, according to Tuesday’s report, up from an earlier estimate of 2.2% and topping 2.5% growth during the second quarter.

The biggest upward revision came in household spending on services, which climbed at a 2.5% pace last quarter versus an earlier estimate of 1.2% growth. Health-care outlays alone contributed 0.52 percentage point to the quarter’s GDP growth. The new figures relied on newly available revenue estimates for service-providing firms.

Business spending, as measured by fixed nonresidential investment, also was revised higher. Spending on structures rose at a 4.8% pace in the third quarter, revised up from 1.1% growth. Spending on software, research and development and other intellectual property products climbed 8.8% versus an earlier estimate of 6.4% growth. Investment in new equipment rose at an 11% pace, revised upward slightly from 10.7%.

Residential investment also was revised higher, and private inventories were revised to show a smaller drag on growth than initially estimated. Government spending was revised higher, too.

Final sales of domestic product, a version of GDP that strips out inventory changes, also grew at a 5% pace in the third quarter. Final sales to domestic purchases, which includes imports but strips out inventories and exports, rose at a 4.1% rate.

Write to Ben Leubsdorf at ben.leubsdorf@wsj.com and Jonathan House at jonathan.house@wsj.com



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