U.S. economy shows solid growth

WASHINGTON - The U.S. economic recovery appears to be gaining traction.

The nation's gross domestic product -- the monetary value of all goods and services produced in the U.S. -- grew at a solid annual rate of 3.5 percent in the July-September quarter, propelled by solid gains in business investment, export sales and the biggest jump in military spending in five years.

The growth figures topped economic forecasts, which had projected GDP for the quarter of around 3 percent.

"The economy does appear to be accelerating of late," said Dan Greenhaus, an analyst with investment firm BTIG. He added that the GDP report showed an economy "on a sounder footing today than at any time over the last few years."

The Commerce Department says that the third quarter result followed a 4.6 percent rebound in the second quarter. The economy shrank at a 2.1 percent rate in the first three months of the year due to a harsh winter.

The report was the first of three estimates of GDP. Economists believe the economy is maintaining momentum in the current quarter with consumer spending expected to be helped by a big fall in gas prices.

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Many economists think full-year growth for 2015 will hit 3 percent, giving the economy the best annual performance since 2005, two years before the Great Recession began.

Paul Ashworth, chief U.S. economist with Capital Economics, thinks an increase in Americans' wages and income will help fuel growth.

"Real personal disposable incomes increased by a healthy 2.7 percent in the third quarter and, with the prospect of further big gains in employment and the impact of the slump in energy prices, real incomes should enjoy an even bigger gain in the fourth quarter," he said in a research note.

The economy's growth spurt over the last six months seems to validate the Federal Reserve's decision to end its stimulus program, a policy known as "quantitative easing" that it had put in place in 2008 to shore up sagging growth. As expected, the central bank said yesterday that it would end its monthly purchases of mortgage and Treasury bonds.

That is focusing attention on when the Fed could begin to normalize monetary policy by raising interest rates. Although most forecasters have expected such tightening to start in mid-2015, the recent pick-up in economic activity could move rate hikes forward, some experts think.

"If growth continues at this pace -- we think it will -- the first Fed tightening could easily come in the spring, especially if wage gains start to pick up," said Ian Shepherdson, chief economist with Pantheon Macroeconomics, in a client note.

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Consumer spending contributed 1.2 percentage points to growth in the third quarter. Another major contribution came from an 11 percent rise in export sales, far outpacing imports, which fell at a 1.7 rate. The smaller trade gap added 1.3 percentage points to growth in the third quarter.

Stronger government spending added another 0.8 percentage point to growth, with federal spending growing at a 10 percent rate. It was the first positive contribution in more than two years. Federal activity had been constrained by spending cuts and last year's partial government shutdown.

One question mark in the latest GDP figures is the big jump in defense spending, which rose 16 percent in the third quarter. Large increases in defense expenditures typically reverse in future months, which could curb growth.

The data comes amid concern that the U.S. export boom, led by an increase in the value of the dollar, may soon fade due to weakness overseas. Europe is on the brink of its third recession in seven years, Japan is faltering, and China and Brazil are also struggling.