U.S. GDP growth is 3.5% in 3rd quarter

The U.S. economy grew at a solid annual rate of 3.5 per cent in the July-September quarter, auguring well for its long-term health and ability to boost growth worldwide.

The Commerce Department reported the good news Thursday, with 3.5 per cent growth better than economists had expected.

The U.S. economy shrank 2.1 per cent in the icy cold first quarter, then rebounded 4.6 per cent in the second quarter and maintained that momentum in the third.

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An 11 per cent rise in export sales and an increase of 7.2 per cent in business investment spending helped power growth.

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

Consumer spending is also in recovery from the dismal first quarter, up 1.8 per cent from a year earlier. Falling gas prices helped put more money in consumers’ pockets and there was more consumer optimism as job growth picked up.

U.S. unemployment rate is now at a six-year low of 5.9 per cent and the economy added 248,000 jobs in September, extending a string of strong gains. The Fed still notes a low participation rate in the economy, with many long-term unemployed who have stopped looking for work.

However, the pickup in job creation should lead to more income and consumer spending, which accounts for 70 per cent of economic activity.

Caution on consumer spending, exports

TD senior economist James Marple noted some soft spots in consumer spending, with spending on durables up seven per cent, but spending on non-durables and services growing at just 1.1 per cent.

The strong export growth is unlikely to last because of the rising U.S. dollar, he said.

“The sources of growth in the third quarter are somewhat at odds with the pattern of global economic activity, with strength coming from net exports and weakness in domestic spending. This is unlikely to continue. The bounce back in net-trade follows two quarters in which imports exceeded exports. Going forward, the appreciation in the U.S. dollar and slow growth in Europe and Asia are likely to once again make trade a net-drag on American economic growth,” Marple said in a note to investors.

Marple said slow growth in the rest of the world is a threat to the U.S. recovery.

“The central question facing financial markets is how well the American economy can hold up while much of the rest of the world struggles and devalues. The Federal Reserve certainly thinks it will, judging by the hawkish tone of its recent interest rate announcement,” he said.

On Wednesday, the Fed ended its quantitative easing program and gave a slightly more hawkish take on rates going forward.

Good news for Canada

The strength of the U.S. economy is good news for Canada, which should benefit more exports.

In a report Tuesday, Export Development Canada said Canada’s number one customer is emerging as a driver of world economic growth.

The EDC predicts Canada’s exports to the U.S. will rise 12 per cent in 2014 and six per cent in 2015 because of rising U.S. domestic demand.

Lowering government austerity and increasing business confidence seem to indicate the U.S. will keep growing as it repairs infrastructure and boosts building to make up for the past five years, the EDC said.

Today’s Commerce Department numbers show stronger government spending added another 0.8 percentage point to growth, with federal spending growing at a 10 per cent rate and defence spending up 16 per cent.

Strengthening U.S. demand also has the potential to power other world economies as growth slows in Japan, the EU and China.