US economy accelerates sharply in Q3; consumer spending rises

WASHINGTON (REUTERS) - The US economy grew at its quickest pace in 11 years in the third quarter, the strongest sign yet that growth has decisively shifted into higher gear.

The economy appears to have sustained some of the momentum in the fourth quarter. Other data on Tuesday showed consumer spending rose solidly in November, which could offset an unexpected weakness in durable goods orders.

"After four years of rocky recovery the US economy is now hitting its stride ... and growth should remain good next year, with lower gasoline prices a big plus for consumers," said Gus Faucher, a senior economist at PNC Financial Services in Pittsburgh.

The Commerce Department revised up its gross domestic product growth estimate to a 5.0 per cent annual pace, citing stronger consumer and business spending than it had previously assumed.

It was the fastest growth pace since the third quarter of 2003. The economy was previously reported to have expanded at a 3.9 per cent rate.

GDP growth has now been revised up by a total of 1.5 percentage points since the first estimate was published in October. Big revisions are not unusual as the government does not have full information when it makes its initial estimates.

U.S. stocks rallied on the data, with the Dow Jones Industrials breaking through 18,000 points for the first time. Prices for US Treasury debt fell, while the dollar rose to a fresh eight-year high against a basket of currencies.

The economy expanded at a 4.6 per cent rate in the second quarter, meaning it has now experienced the two strongest back-to-back quarters of growth since 2003.

Economists polled by Reuters had expected growth would be raised to a 4.3 per cent pace in the third quarter.

But the pace of growth likely slowed in the fourth quarter.

In a second report, the Commerce Department said non-defence capital goods orders excluding aircraft, a closely watched proxy for business spending plans, was unchanged in November after declining 1.9 per cent in October.

The continued weakness in the so-called capital goods orders is at odds with industrial production data, which has shown strong momentum in the manufacturing sector.

In a third report, the Commerce Department said consumer spending, which accounts for more than two-thirds of U.S. economic activity, rose 0.6 per cent in November after gaining 0.3 per cent in October.

A rapidly strengthening labour market and lower gasoline prices are boosting consumer spending, which should help to cushion the economy from slowing growth in China and the euro zone, as well as a recession in Japan.

That should provide the economy with sufficient momentum in 2015 and keep the Federal Reserve on course to start raising interest rates by the middle of next year.

Underscoring the economy's firming fundamentals, growth in domestic demand was revised up to a 4.1 per cent pace in the third quarter instead of the previously reported 3.2 percent pace. It was the fastest pace since the second quarter of 2010.

In the GDP report, consumer spending grew at a 3.2 per cent pace, the fastest since the fourth quarter of 2013, instead of the previously reported 2.2 per cent rate.

Growth in business investment was raised to an 8.9 percent pace from a 7.1 per cent rate, with a stronger pace of spending than previously thought on equipment, intellectual property products and nonresidential structures accounting for the revision.

Inventories were also revised higher, with restocking now being neutral to GDP growth instead of being a mild drag. That also helped to offset downward revisions to export growth.

But inventories could undercut output in the fourth quarter.

Spending on residential construction was also revised higher, as were government outlays. While export growth was trimmed, trade still contributed to GDP growth.