A surge in US economic growth lifted stocks on Tuesday to record highs and showed that the US is putting distance between itself and struggling economies around the world.
Fueled by hiring gains, cheaper gas and rising confidence, consumers and businesses drove growth to a 5 percent annual rate last quarter. Although the economy is likely cooling a bit, its solid pace is brightening hopes for next year. The economic strength could also shape the US Federal Reserve’s timetable for raising interest rates from record lows.
The government’s third and final estimate of growth for the July-to-September period was the strongest for any quarter in 11 years. The result cheered investors. The Dow Jones Industrial Average ended the day up about 64 points to 18,024, the first time it has surpassed 18,000.
In its report on Tuesday, the US government sharply upgraded third-quarter growth from its previous estimate of 3.9 percent.
Much of the increase came from consumer spending on healthcare, and business spending on structures and software. The economy has been benefiting from sinking energy prices, which have helped keep overall inflation ultra-low. Fuel prices have fallen for 88 straight days, according to the US automobile organization AAA — the longest consecutive decline on record. Cheaper fuel has acted like a tax cut, allowing US citizens to spend money on other items, including cars, clothes and appliances.
Last quarter’s growth was the fastest since summer 2003 and it followed a 4.6 percent annual rate in the April-to-June quarter. The government separately reported on Tuesday that last month, consumer spending rose the most in three months and income by the most in five months.
“After four years of rocky recovery the US economy is now hitting its stride with a notable acceleration in growth,” PNC Financial Services Group senior economist Gus Faucher said. “Growth should remain good next year, with lower gasoline prices a big plus for consumers.”
BMO Capital Markets senior economist Sal Guatieri said he expects healthy consumer spending to fuel economic growth of 2.6 percent this quarter. Guatieri forecast solid growth of 3.1 percent next year. That would be the best performance since the economy grew 3.3 percent in 2005, two years before the financial crises hit in 2007.
Since the recession officially ended in June 2009, the economy has struggled to regain full health. Five years of growth have averaged only 2.2 percent.
Tuesday’s figures are sure to be closely studied by the Fed. Last week, the Fed ended a policy meeting by saying it would be “patient” in deciding when to raise rates because the economy was not yet fully healthy. Many investors concluded that no rate hike was likely before the middle of next year at the earliest and they drove share prices to record highs.
However, unexpectedly strong expansion, however, could escalate pressure on the Fed to raise rates, even though inflation remains well below its 2 percent target. One reason the Fed has kept its benchmark short-term rate near zero since 2008 has been to try to lift inflation from excessively low levels.
The US government figures released on Tuesday show that the inflation gauge the Fed most closely watches has risen just 1.2 percent over the past 12 months. Partly as a result, few analysts think Tuesday’s figures will prompt the Fed to raise rates early next year.
“We don’t see the Fed moving before June,” IHS Global Insight chief economist Doug Handler said.
When the Fed does begin raising rates, Handler and others think the increases are set to be gradual and have only a slight effect on growth.
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