U.S. economy grew at 3.5 percent pace in third quarter, boosted by defense

By Janel ForteReal GDP Chart

The U.S. economy grew at a stronger-than-expected rate of 3.5 percent in the third quarter, bolstered by a surge in defense spending and a sharp narrowing of the trade deficit, the Commerce Department reported Thursday.

Real gross domestic product, the broadest measure of the economy’s output of goods and services, adjusted for inflation, had been expected to rise by 3.0 percent. Real GDP in the second quarter rose 4.6 percent at an annualized rate.

“The economy reaccelerated nicely in the second and third quarters after a decline in the first quarter,” Diane Swonk of Mesirow Financial noted in a blog post.

According to the government’s report, there was a 16 percent surge in federal defense spending related to the conflict in the Middle East, accounting for 0.7 percentage points in growth.

“Barring this special factor, growth would have fallen a bit short of expectation, though it still marks a meaningful step up in performance compared with recent years,” said Sal Guatieri, senior economist of the BMO Financial Group, in a note.

In addition to defense spending, there was substantial growth from foreign trade. Increases in exports and a modest decline in imports led to a 1.3 percentage point contribution to growth from the trade sector.

Economists are wary of the tendency for defense spending and net foreign trade to lead to payback in the following quarter.

“This suggests some loss of economic momentum,” warned Guatieri. ”And a modest downside risk to our current estimate of 3.0 percent growth in Q4, notably if defense pulls back sharply.”

Some economists have already lowered their estimates for the fourth quarter.

“Growth for the year is expected to be subdued, running closer to 2 percent than 3 percent,” Swonk said.

Consumer spending is projected to pick up as the holiday season approaches, but an unexpected drop in September durable goods orders Tuesday raised concerns about the strength of business investment.

The GDP report came a day after the Federal Reserve issued a policy statement that underscored “sufficient underlying strength in the broader economy,” which it used to support its decision to end the monetary stimulus program.