U.S. growth in 3rd quarter picked up to 3.2%

The U.S. economy in the third quarter grew at the fastest pace in two years, with a revised report showing stronger consumer spending than first estimated.

The gross domestic product, the country's total output of goods and services, expanded at an annual rate of 3.2 per cent in the July-September period, the Commerce Department reported Tuesday. That is up from a previous estimate of 2.9 per cent.

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The revision was significantly better than the meagre gains of 0.8 per cent in the first quarter and 1.4 per cent in the second quarter when the economy was being held back by a strong dollar and weak business investment.

The 3.2 per cent increase was expected to be the best showing for the year. Economists believe growth has slowed to around 2 per cent in the current quarter.

Consumer spending strong

The latest look at GDP, the second of three estimates from the government, showed that consumer spending grew at a 2.8 per cent rate in the third quarter, better than the 2.1 per cent advance first estimated. The new-found strength reflected more spending than initially thought in such areas as auto purchases and utility bills. Still, consumer spending, which accounts for 70 per cent of economic activity, slowed from a gain of 4.3 per cent in the second quarter.

"Today's report was largely good news, as consumer spending, which had looked a tad modest in the advance report, now grew at a near- three per cent pace. That comes on the heels of a 4.3 per cent jump in the second quarter, painting a picture of a healthy and confident U.S. consumer, supported by continued gains in the labour market," Leslie Preston, senior economist at TD Bank, said in a note to clients.

But Preston said that confidence has not yet spread to businesses, who aren't spending on equipment despite a rebound in corporate profits in the third quarter.

Other areas of strength were in export sales, which grew at a 10.1 per cent rate. Although the figure partially reflected a temporary surge in exports of soybeans, economists are hopeful that exports will show further gains in the months ahead. Earlier in the year, American manufacturers were battered by a strong dollar which made their goods more expensive on overseas markets.

Annual growth at 1.5%

For the year, the economy is expected to grow a modest 1.5 per cent, down from 2.6 per cent growth in 2015 — the best performance in the seven years since the Great Recession ended in mid-2009.

RBC economist Nathan Janzen sees "evidence of a strengthening in the underlying economic backdrop."

He is predicting 2.1 per cent GDP growth in the fourth quarter in the U.S., which could set the Federal Reserve on the path towards raising rates.

"That should be sufficient to clear the way for a (widely expected) 25 basis point hike in the Fed funds target range at the Dec. 14 meeting," he said.

During the recent campaign, President-elect Donald Trump decried what he saw as a sluggish economic recovery under President Obama, with GDP gains averaging around two per cent since the end of the recession. Trump said he wanted to set a national goal of reaching four per cent growth during his administration.

Is Trump overly optimistic?

Most economists think that may be overly optimistic given the mass retirement of baby boomers, which would weaken growth in the labour market, and very tepid productivity growth.

Some economists have said they will boost their GDP forecasts if Trump is successful in getting Congress to pass his package of tax cuts and increased spending in such areas as defence and infrastructure projects. But their current estimates put growth at around 2.5 per cent over the next two years, an improvement from their current forecast of growth next year of around 2 per cent, but well below Trump's 4 per cent target.

By major categories, business investment in new plants and equipment edged up at an annual rate of just 0.1 per cent in the third quarter. This sector has been held back by steep cutbacks in spending by energy companies responding to the plunge in oil prices. Government spending increased a slight 0.2 per cent as a gain at the federal level offset cutbacks at the state and local level.