WASHINGTON — The U.S. economy grew at a surprisingly robust 4.1 percent annual pace in the third quarter, the Commerce Department said Friday. That is the strongest growth in nearly two years and only the third time the economy has expanded that quickly since 2006.
It is the latest evidence that the generally sluggish recovery is gaining strength, although economists noted that the underlying rate of growth remains at a trot, not a gallop – a pace of about 2.5 percent a year.
“We continue to believe that underlying growth will remain on a moderate trend,” said Joshua Shapiro, the chief U.S. economist at MFR Inc., a consulting firm. “The outlook is greatly dependent on the direction of the labor market, and hence the path of wage and salary growth and the ability of consumers to expand spending.”
With stronger growth, the job market is improving, but earnings and employment remain far from healthy levels, economists think. The unemployment rate fell to 7 percent in November from 7.8 percent a year earlier. But that improvement is in no small part because of workers leaving the labor force, and many working households are still struggling with stagnant incomes.
Still, the Commerce Department data, which raised the estimate of third-quarter growth from an earlier 3.6 percent, shows more evidence of faster and broad-based growth that might lead to a healthier labor market – and more solid growth – in 2014.
The refined estimate is based on “more complete source data,” the department said, that showed personal consumption and business investment to be higher than previously thought. Those figures came in “dramatically better than initially expected after an unusually large series of surprises,” said Morgan Stanley economists in a note to clients, calling the government release a generally “strong report.”
Economists had expected the final estimate of growth to be unchanged from the earlier 3.6 percent. But the data showed that consumers have stepped up their spending on health care, houses and cars as the strengthening recovery has led businesses to hire and rising home values have improved household balance sheets.
The Commerce Department increased its estimate of consumer spending, which accounts for more than two-thirds of economic activity, to a 2 percent rate from 1.4 percent.
The economy’s general strength has spurred the Federal Reserve to begin to unwind its bond-buying program, cutting its monthly purchases of Treasury and mortgage-backed debt.
“In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions, the committee decided to modestly reduce the pace of its asset purchases,” the Fed said in a statement this week.
The third-quarter growth came from a broad range of other sources: personal consumption, exports, investment in new factories and houses, state and local government spending and a rise in business inventories. Federal spending cuts and rising imports were a drag on growth, the department said.
Economists expect growth to slow in the fourth quarter, in part because some of the upswing has resulted from businesses building up their inventories.
While Wall Street “has been concerned with the swing in fiscal policy between 2013 and 2014, they should be focused on the swing likely in inventory,” said Steven Ricchiuto, the chief economist at Mizuho Securities USA. “A lot of this inventory is cars and light trucks.”
Even so, economists said that the underlying pace of growth remains strong enough to expect a better 2014 than 2013, given increasing consumer spending and stronger business fundamentals, including high corporate profits.
“The third-quarter’s stellar growth rate is not destined to be repeated, but is it a harbinger of a better year for the economy in 2014,” said Douglas Handler, the chief U.S. economist for IHS Global Insight, citing strength in the housing market and in exports.