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December 23, 2014 8:35 AM, EST

Economy Grows by Most in a Decade on Consumer-Spending Gain

Craig Warga/Bloomberg News

The world’s largest economy surged in the third quarter, expanding at the fastest pace in more than a decade, as U.S. consumers and businesses spent more than previously estimated.

Gross domestic product grew at a 5% annual rate from July through September, the biggest advance since the third quarter of 2003, and up from a previously estimated 3.9%, revised figures from the Commerce Department showed in Washington. The median forecast of 75 economists surveyed by Bloomberg News projected a 4.3% increase.

Consumer spending is poised to charge into 2015 as more employment and lower gasoline prices boost household confidence and buying power, one reason why the Federal Reserve will probably raise interest rates next year. Other aspects of GDP, including inventories, trade and government spending, are unlikely to maintain the strength seen last quarter, indicating the pace of growth will moderate at the end of the year.

“After five years of weak growth, the economy is finally coming out of rehab,” Ethan Harris, co-head of global economics research at Bank of America Corp. in New York, said in a research note before the report. “Look for the Fed to change policy in a way that only slowly and modestly tightens financial conditions.”

The estimate is the third and final for the quarter and followed a 4.6% advance from April through June.

The economy grew at an average pace of 1.3% in the first half of the year after expanding at a 2.2% rate in all of 2013.

Household purchases, which account for almost 70% of the economy, rose at a 3.2% annual pace, compared with a previously reported 2.2%. The revisions reflected stronger spending on health care, recreation and financial services than previously estimated. Outlays on durable and non-durable goods were also revised up.

Personal consumption added 2.2 percentage points to growth. It rose at a 2.5% pace in the prior three-month period.

Business investment was also revised up across the board, with bigger gains reported for spending on construction projects, equipment and intellectual property, which includes software and research and development.

Another report Dec. 23 showed similar advances will be difficult to match this quarter. Orders for durable goods, which are those meant to last at least three years, unexpectedly dropped in November, according to Commerce Department data. Demand for computers, metals and electrical equipment declined or was little changed last month as the global economy cooled.

A smaller trade deficit added 0.8 percentage point to GDP growth last quarter, the report showed. That will also probably be difficult to replicate at the turn of the year as a global growth slowdown hobbles exports and gains in consumer spending draws in more imports.

The report showed federal government outlays added 0.7 percentage point to third-quarter growth as federal defense spending jumped by the most since 2009. Total government spending rose at a 4.4% pace.

Plunging prices at the pump are giving Americans extra cash to spending elsewhere. The average price of a gallon of regular gasoline fell to $2.38 as of Dec. 22, the lowest since May 2009, according to motoring group AAA.

Job growth on track for its best performance since 1999 also is helping to keep up domestic demand. Employers added 321,000 to payrolls in November, raising the monthly average so far this year to 240,910. Last year, the U.S. economy gained an average 194,250 jobs per month.

The U.S. economic advances have allowed Fed policy makers to relax accommodation measures that were meant to stimulate growth following the last recession. The officials last week raised their assessment of the labor market and said they’ll be “patient” on the timing of the first interest-rate increase since 2006, replacing a pledge to keep borrowing costs near zero for a “considerable time.”

The central bankers in October ended an unprecedented monthly asset purchase program that swelled the balance sheet to more than $4 trillion.