NEW YORK – The U.S. economy grew last quarter at its fastest rate in over 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, including increased outlays on health care, and a narrower trade balance also contributed to the summer improvement. The gain makes the third quarter the strongest since the summer of 2003.
The stronger data was greeted happily on Wall Street, with the Dow Jones industrial average closing above the 18,000 level for the first time. The broader Standard & Poor’s 500 stock index also hit a record high, while the Nasdaq dropped slightly.
The Dow is now up 8.7 percent for the year, while the S&P 500 has risen 12.7 percent.
The White House said 2014 is ending up as a “breakthrough year for the United States” on key middle-class indicators.
“The steps that we took early on to rescue our economy and rebuild it on a new foundation helped make 2014 already the strongest year for job growth since the 1990s,” Jason Furman, chairman of President Obama’s Council of Economic Advisers, said in a statement. Even so, he cautioned there was “more work to be done to ensure that all Americans can share in the accelerating recovery.”
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 U.S. 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 stated 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 reading that was significantly better than expected. Similarly, consumers have gotten a big boost recently from the steep drop 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 in 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 year’s 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 at their best levels since January 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 it signaled last week that it would remain patient in order to confirm that faster growth looked sustainable and would translate into increased hiring over the long term.
Doug Handler, chief U.S. economist at IHS, a consulting firm, said the data released Tuesday, along with the recent jobs report and comments by Fed officials, “solidifies our expectations that some action will be taken in June.”
“It looks like we have a stronger economy than we thought a month ago,” he added, “which creates a compelling case for tightening.”
The latest data brings the average rate of growth in the first three quarters of 2014 to about 2.5 percent. Handler said he now expected fourth-quarter growth to be between 2.5 and 3 percent, up from an earlier estimate of roughly 2 percent, and predicted that the economy would grow 3 percent next year.
The better-than-expected numbers Tuesday also prompted other experts to revise their forecasts 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.