The nation's economy overcame a round of federal budget cuts and posted a surprisingly strong 3.6 percent growth rate in the summer quarter, the Commerce Department reported Thursday.
The pickup in growth from 2.5 percent in the second quarter reflected an economy firing on nearly all cylinders, with contributions from consumers and businesses, exports and state and local governments, as well as a sterling performance by the housing market.
Only the federal government took away from growth, with spending by the Pentagon and the federal bureaucracy falling by 1.4 percent as a result of across-the-board budget cuts imposed in March. Federal spending has declined in 10 of the last 12 quarters, detracting from the economy's performance.
But the reviving private sector and growing revenues have enabled state and local governments to increase spending after a long drought during the recession, offsetting some of the drag from the federal government.
"The U.S. economy performed surprisingly well in the third quarter, growing at the fastest pace in a year," said Joseph Lake, analyst with the Economist Intelligence Unit. "The economy, on balance, seems to be navigating most of the obstacles in its path."
He called the third quarter's 1.7 percent increase in state and local spending "a bright spot" which suggested that the "worst is over" for the hard-hit municipal sector, where the Great Recession caused record-breaking bankruptcies like the one in Detroit.
And while the budget battles in Washington will continue to keep a damper on federal spending and a lid on economic growth, they have had the welcome result of helping to halve the dangerously high federal budget deficits caused by the recession, he said.
"The U.S. economy shows no signs of a major breakout, but it has been surprisingly resilient in the last six months, and we expect that pattern to continue into the new year," Mr. Lake said.
Ted Wieseman, economist with Morgan Stanley, said he was surprised by the pickup in economic growth, but he attributed most of it to a surge in inventory-building by businesses.
Since those stockpiles of cars, toys and other goods will have to be sold off to consumers, he said it will lead to slower growth than previously expected in the final quarter of the year, perhaps as low as 1 percent.
Still, like many economists, Mr. Wieseman believes the underlying economy is strengthening despite the many obstacles thrown in its way by Congress, including October's 16-day partial shutdown of the federal government.
"Inventory swings and shutdown disruptions distort what we expect will be an improving underlying trend in private demand," he said. "We expect [that] will continue to support stronger trend growth through 2014 and 2015."
The Commerce report showed that businesses have another major reason to be optimistic: they are brimming with profits. After-tax profits surged by 10.7 percent in the summer, raising the share of national income devoted to profits to nearly a record high of 11.7 percent.
The rosy profit picture is a major driver of the stock market rally, which promises to post double-digit gains for investors again this year.
But it also is behind the lagging growth in wages which has plagued the middle class and consumers, and is dampening Christmas sales this year.
With profits lingering near record levels set earlier in the otherwise lackluster recovery, investors are getting what has historically been a disproportionately large share of the national income pie, while workers' share has been shrinking.
Profits are soaring, but average wages, after adjusting for inflation, haven't grown at all since the last economic expansion in 2007, leaving most consumers with little earning power to increase spending on Christmas gifts. Reflecting the weak income growth, consumer spending increased in the summer quarter at a tepid 1.4 percent annual rate.
The federal budget cuts also are holding back some consumers, according to a recent survey of the nation's military personnel. First Command, a financial planning service for service members, said military families plan to cut their Christmas spending nearly in half to $769 on average this year from $1,439 last year. Soldiers surveyed said they feared Congress will impose further defense downsizing and furloughs in 2014.
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