The economy grew healthy 3.5% in third quarter

The economy grew faster than previously thought in the third quarter on stronger consumer spending, commercial construction and state and local outlays.

The nation’s gross domestic product — the value of all goods and services produced in the economy —  increased at a seasonally adjusted annual rate of 3.5%, up from the 3.2% previously estimated, the Commerce Department said Thursday. That’s the largest gain in two years. Economists surveyed by Bloomberg had forecast a revision to 3.3% growth.

The healthy expansion last quarter followed a sluggish nine months in which the economy grew at about a 1% rate amid feeble business investment — half the roughly 2% pace that has characterized most of the seven-year-old economic recovery. 

Consumer spending, which makes up about 70% of economic activity, increased 3% last quarter, a bit more than the previous 2.8% estimate. Solid job and income growth, cheap gasoline and reduced debt have left Americans with more money in their pockets.

And business investment rose 1.4%, stronger than the 0.1% previously believed. Commercial construction surged 12% while equipment spending fell 4.5%.  Capital spending has been weak for nearly two years because of a listless global economy and strong dollar that have hurt exports, as well as the oil sector downturn. But oil prices have risen in recent months, helping spur a partial rebound, and the greenback leveled off until a recent rally.

Partly as a result, exports rose 10% while imports increased just 2.2%, narrowing the nation’s trade gap.

Meanwhile, state and local spending dipped 0.2%, less sharply than the last 1.1% estimate. Residential Investment also declined a bit less dramatically than believed, 4.1%.

"Altogether, the third estimate of Q3 GDP paints a picture of a healthy consumer, likely fueled by ongoing gains in employment, modest increases in wages, and solid balance sheets," Barclays Chief U.S. economist Michael Gapen wrote in a note to clients.

This was the third and final estimate of economic growth in the third quarter.

Many economists expect growth to slow to less than 2% in the current quarter as a result of a pullback in consumer spending and weaker exports before picking up next year, in part because of President-elect Donald Trump's proposed tax cuts and plans to boost spending on infrastructure.

Separately, Commerce said that orders for durable goods fell 4.6% in November because of a sharp decline in demand for commercial aircraft, which is volatile. But non-defense capital goods orders, excluding aircraft, a proxy for capital spending, jumped a solid 0.9%. That should bolster estimates for economic growth in the fourth quarter.