Will U.S. economy breakout in 2013?

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(MoneyWatch) Today's better than expected report on U.S. economic activity is raising a very unexpected question: Could 2013 be a breakout year for the nation's economy?

The U.S. economy grew at an annual rate of 3.1 percent in the third quarter of this year, according to Commerce Department. Today's report, the department's third and final estimate of growth for the July-September quarter, was revised up from a 2.7 percent annual rate a month ago. This is the fastest growth since late 2011 and is more than twice the second quarter's anemic 1.3 percent growth rate.

The growth was the result of a rise in exports, increased consumer spending and state and local governments adding to growth for the first time in nearly three years.

"The latest revision was a healthy one, because it was not driven by higher inventories," said Nigel Gault, chief US economist for IHS Global Insight. "This time, final sales growth was the driver, revised up to 2.4 percent from 1.9 percent as net exports, consumer spending, and state and local construction spending were all revised up."

Exports increased at a 1.9 percent rate, instead of earlier 1.1 percent. Government spending was also greater than previously thought: Revised to 3.9 percent from 3.5 percent. These numbers were the result of a rebound in state and local government spending. That alone added three quarters of a percentage point to the third quarter's GDP growth.

Consumer spending, which is responsible for nearly three-quarters of U.S. economic activity, rose 0.2 percentage point to 1.6 percent, mostly because of increased healthcare spending.

The question now is whether this growth will continue.

In order to do so it will have to overcome some significant hurdles. Global demand is continuing to cool and, domestically, companies are limiting spending and hiring in the face of all-but-certain tax increases and spending cuts. On the positive side, the housing market continues a slow but steady improvement and the Federal Reserve is pushing record stimulus efforts in hopes of bigger gains for the expansion.

Robert Kavcic, an economist at BMO Capital Markets, said the upward revision to third-quarter growth didn't change his view that the economy is slowing in the current quarter to an annual growth rate below 2 percent. Kavcic said a temporary jump in defense spending and business stockpiling in the July-September period is likely being reversed this quarter.

And many economists aren't expecting much improvement in the January-March quarter. The latest forecast from 48 economists for the National Association of Business Economics is for an annual growth rate of just 1.8 percent in the first quarter of 2013. Growth at that level is considered too weak to significantly lower the unemployment rate, which was 7.7 percent in November.

But if Congress and the White House reach agreement to avoid the fiscal cliff, growth could accelerate next year, many economists, including Federal Reserve Chairman Ben Bernanke, have said. The Fed last week said it plans to keep a key interest rate at a record low as long as unemployment remains above 6.5 percent. And it forecast that unemployment would stay that high until late 2015.

The Associated Press contributed to this report

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    Constantine von Hoffman is a freelance writer and writing coach. His work has appeared in outlets such as Harvard Business Review, NPR, Sierra magazine, Brandweek, CIO, The Boston Herald, TheStreet.com, CSO, and Boston Magazine.

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