Business

U.S. GDP expands at 3.9% pace in third quarter

The U.S. economy grew at a solid 3.9 per cent annual rate in the July-September period, even faster than first reported, giving the country its strongest six months of growth in more than a decade.

Strong showing from U.S. raises likelihood of rate hikes sooner rather than later

A welder works on an offshore oil platform in the Gulf of Mexico. New data from the U.S. shows the American economy is expanding at its fastest pace since 2003. (Patrick Kelley/Bloomberg)

The American economy expanded at an annual rate of almost four per cent over the summer, which means the world's largest economy is growing at its fastest six-month pace since well before the last recession.

The U.S. Commerce Department on Tuesday revised its quarterly GDP figure up to 3.9 per cent in the July-to-September period, even better than it had first reported.

It's also almost twice as strong as the 2.2 per cent growth rate of the Canadian economy, according to the latest Canadian data.

The 3.9 per cent pace of growth comes on the heels of a 4.6 per cent expansion in the spring. That's the best two-quarter showing since 2003. It comes on the heels of an especially poor showing to start the year, which most watchers blamed on the bitterly cold winter putting a chill on the economy, as people had trouble even getting into work.

Economists are expecting that pace to slow a little in the current quarter to an annual rate of about 2.5 per cent, but that's still a strong showing.

"The question of whether the economy is accelerating or will accelerate is no longer a question; we can say somewhat definitively that the economy has already accelerated," said Dan Greenhaus, chief strategist at BTIG.

Rate hike coming?

In 2015, the U.S. economy is forecast to do even better. Oil prices — while a complicated issue from a macroeconomic perspective — are translating into much cheaper gasoline prices, which should at the very least put more money in consumers' pockets for everyday items, which should give consumer spending another boost.

Virtually all parts of the U.S. economy kicked things into a higher gear, the numbers show. Consumer spending, which makes up more than two-thirds of the economy, expanded by 2.2 per cent. And businesses opened their wallets even more, spending 10.7 per cent more on things like new equipment and facilities.

Government spending also kicked up, increasing by 4.2 per cent in the third quarter. In the latter part of 2013, political bickering resulted in a crackdown on government spending  that went as far as a shutdown of government services for several weeks.

But that seems to be all over now. Defence spending alone increased by 16 per cent in the quarter from its previously depressed level.

"The prospects for government spending have greatly improved," TD Bank said after the numbers came out. "State and local governments are now adding jobs and are likely to raise spending (albeit modestly) over the coming years."

If the U.S. economy stays hot, the question will move to when American policymakers will need to step in and finally raise interest rates. Currently, the U.S. base lending rate is at effectively zero, where it's been since emergency stimulus measures were implemented in 2009.

Currently, most economists expect interest rates to begin rising some time later next year at the earliest. But with more data points like Tuesday's, it's far from certain that the Fed could wait that long before intervening to contain inflation.

"The bottom line is that the U.S. recovery is firmly on track," TD said. " This is all the impetus the Fed needs to begin moving rates higher."

With files from The Associated Press

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