The U.S. economy grew at its fastest rate in more than a decade between the months of July through September, according to government data released Tuesday morning, marking the latest sign that a once-sluggish recovery is now running at full speed.
The Commerce Department said gross domestic product growth hit an annualized rate of 5 percent in the third quarter, revised upward from the previous estimate of 3.9 percent. Not since 2003 has the economy expanded so quickly.
The better-than-expected GDP numbers helped push the Dow Jones Industrial Average above 18,000 for the first time, the latest in a series of record highs. The S&P 500 also edged up.
Economists say the United States is showing signs of a virtuous cycle in which workers can find suitable jobs that pay well and allow them to spend money. A year of robust labor market growth has been helped by falling oil prices, which amounts to a de facto tax cut and saves consumers hundreds annually at the pump.
The latest third-quarter estimate rose “for all the right reasons, notably stronger domestic demand,” Diane Swonk, chief economist at Mesirow Financial, wrote in a blog post. The contribution of consumer spending was revised upward by 0.7 percent from the previous Commerce Department estimate, given last month. Business investment was revised upward by 0.2 percent.
“Indeed, depending on the outcome for the fourth quarter, growth for the year could now surpass 2.5 percent, which is much better than anyone expected just a month ago,” Swonk wrote.
At an annualized rate, consumer spending was up in the third quarter by 3.2 percent. That spending accounts for about two-thirds of the GDP. Though incomes have stagnated for years among the middle and lower classes, there were nascent signs of wage growth last month, and households have deleveraged bad debt that held them back in the wake of the financial crisis.
Consumer sentiment is at a post-recession high, and the nation has seen its best year of hiring in 15 years. The latest six months of expansion suggest that a surprisingly poor first quarter performance — when the GDP shrank 2.1 percent — was an anomaly, likely the result of miserable East Coast winter weather that kept consumers indoors.
For quarterly gross domestic product, which measures all goods and services produces, the U.S. government releases an initial estimate, and then two revisions. This was the second of those revisions.
Economists think the run of good news could spill into the fourth quarter, paving the way for the sharpest U.S. expansion since the recession.
The 5 percent growth follows a strong 4.6 percent expansion in the second quarter. GDP growth has hit 3.5 percent or higher in four of the last five quarters.
“We’re not going to stay at 5 percent, but those last five quarters, it’s a sign that we’ve worked through all the factors that have been dragging down the recovery,” said Gus Faucher, a senior economist at PCN Financial Services Group.
Economists say the U.S. economy appears to have enough momentum to weather slowdowns in Japan and China and lackluster growth in Europe. Oil prices, which were sliding this summer but began a freefall in November, will provide an even bigger boost in the fourth quarter, amounting to billions in savings for American consumers. PNC forecasts that annual GDP growth will end up at 2.3 percent in 2014 and then rise to 3.3 percent in 2015.
The nation's economy is also helped by the fact that state and local governments have weathered a period of austerity and are again contributing to expansion. State and local expenditures and investment were up 1.1 percent annually in the third quarter, following a 3.4 percent expansion in the second quarter.The federal government, too, after two years of tightening and sequestration, is again giving the economy a lift: Its spending was up 9.9 percent in the third quarter. Such figures can fluctuate heavily from quarter to quarter, but economists say the government is unlikely to be a drag over the next year.