Wall Street's economists were looking for much slower growth in gross domestic product of around 1.7 percent to match the 1.8 percent annual growth in the second quarter.
Friday's report, which is based on preliminary information and which will be revised twice in the next two months, questions the common wisdom that the U.S. economy slowed significantly in the summer months.
Overall, the report gives a mixed picture of the economy, with consumer spending remaining a pocket of strength, while business investment, international trade and government spending drag the economy down.
The Federal Reserve has lowered interest rates twice in the past month in an effort to bolster liquidity to prevent a credit crunch-induced recession. The Fed's actions were not based on a slowdown in the U.S. economy, but on the danger the global crisis posed to financial markets.
Friday's relatively strong GDP report could be one factor that would keep the Federal Open Market Committee on the sidelines when it meets on Nov. 17.
One worry the Fed doesn't have, at least yet, is inflation. The GDP implicit price deflator rose at a 0.8 percent annual rate, while the price gauge for domestic purchases rose 0.5 percent.
Despite the much-higher-than-expected growth, the report gives many details supporting the slower-growth scenario. The rise in GDP was fueled by a surprising jump in inventories that added nearly 1 percent to GDP while exports weren't nearly the drag on the economy they had been in the second quarter.
The inventory buildup, to the extent that it is not a statistical fluke related to the two-month strike at General Motors, will likely serve as a brake on the economy going forward as manufacturers reduce output as inventories are gradually worked down.
Inventories rose because consumers slowed their spending on U.S.-made goods to a 2.3 percent increase in the quarter after a 4.6 percent gain in the second quarter. Imports filled some of the gap: Purchases by U.S. residents of goods regardless of origin rose 4 percent after a 3.9 percent increase in the second quarter.
Consumer spending slowed to a 3.9 percent increase after growing more than 6 percent in three of the four previous quarters. Consumer spending on durable goods was flat in the quarter after soaring at double-digit rates in three of the past four quarters. The dropoff in durable purchases could be a temporary event related to the GM strike. Consumers continued to buy services, however, increasing their spending by 5.5 percent.
All that spending on services and imports forced the personal savings rate to an all-time low of 0.1 percent. That's a factor that should restrain growth going forward as well, because consumers could be just about tapped out. When the stock market was booming, consumerdidn't need to save as much out of current income to meet their savings goals, but now that the markets are going sideways, they may need to cut back on spending.
Businesses, too, are reacting to the stock market swoon and the profits recession. Fixed business investment fell 1 percent in the quarter, the first decline since the fourth quarter of 1991. The drop was concentrated in structures, which dropped 6.5 percent. Investments in equipment rose just 1.1 percent.
Written by Rex Nutting, Washington bureau chief for CBS MarketWatch