GDP surprise: Economy grew 2.8 percent in third quarter

WASHINGTON The U.S. economy expanded at a 2.8 percent annual rate from July through September, a surprising sign of strength. Much of the growth came from a surge in business restocking.

Home construction also rose and state and local governments spent at the fastest pace in four years. But businesses spent less on equipment, federal spending fell and consumers spent at a slower pace, troubling signs for the final three months of the year.

Overall, growth increased in the third quarter from a 2.5 percent annual rate in the April-June period to the fastest pace in a year, the Commerce Department said Thursday.

The third-quarter outcome was nearly a full percentage point stronger than most economists had predicted and shows the economy was picking up speed this summer. Analysts expect the shutdown will slow growth in the October-December quarter.

Consumers stepped up spending on goods. But overall spending weakened to a 1.5 percent annual rate, down from the second quarter's 1.8 percent pace. That's because service spending was essentially flat, in part because of a cooler summer that lowered utility spending.

Spending by consumers is critical to growth because it drives roughly 70 percent of economic activity. Higher taxes this year and slow wage growth have weighed on consumers' wallets since the start of the year.

PNC Bank Senior Economist Gus Faucher said slow growth in imports also contributed to the strong number, as high numbers of imports reduce GDP.

Businesses boosted their stockpiles in the third quarter. That contributed 0.8 percentage point to growth, double the amount from inventory building in the second quarter. That suggests many companies anticipated healthy spending by consumers and businesses.

Exports rose at a 4.5 percent rate in the third quarter.

Still, businesses cut back sharply on investment in equipment by the most in a year.

Overall government activity grew at a slight 0.2 percent rate, reflecting a 1.5 percent rise in state and local government spending, the best showing since the spring of 2009. Federal government spending continued to drop, falling at a 1.7 percent rate in the third quarter.

A 16-day partial government shutdown last month is expected to keep the economy from accelerating in the final three months of the year.

Many analysts say it could cut more than half a percentage point from growth in the October-December quarter. The shutdown cost the U.S. economy $24 billion, according to Beth Ann Bovino, an economist at Standard & Poor's.

Faucher said while he expects the government shutdown to reduce fourth-quarter GDP by some 0.3 percent, much of that will be made up in the first quarter of 2014. He predicts overall growth next year at around 2.5 percent, up from 1.6 percent this year, as the housing market continues to recover and trade improves.