U.S. GDP Grows 5% on Consumer Spending

U.S. GDP grew at a 5% annual rate in the third quarter as consumers and businesses spent more thanks to lower oil costs and growing confidence in the economy’s future.

U.S. GDP grew at a 5% annual rate in the third quarter as consumers and businesses spent more thanks to lower oil costs and growing confidence in the economy’s future.

The gross domestic product rose at its highest rate since 2003, according to figures released Tuesday morning from the Bureau of Economic Analysis. The 5% annualized gain was far beyond analysts’ expectations, even after many revised their expectations upwards in recent weeks due to lower energy costs. Many economists at investment banks had increased their predictions by 0.1% or 0.2% in recent weeks, but even that optimism proved too humble.

Stocks rose on the news while Treasury yields expect to post modest gains in the day as higher growth may encourage a reflation trend on rising wages. While job gains have remained strong in 2014, wage gains have been meagre and mostly below the rate of inflation as measured by the core Consumer Price Index, or CPI. Many economists predict incomes will rise in 2015 as an increasingly tight labor market allows workers greater freedom to demand higher wages, and businesses larger margins to pay them.

Strong Consumption

Personal consumption accounted for 2.2% of growth, and rose 2.5% quarter-over-quarter and 3.2% year-over-year. Durable goods spending rose 9.2% and nondurable goods rose 2.5%, as rising consumer confidence and lower energy costs encouraged more consumers to make larger purchases in the third quarter.

Consumption from private and government sectors also rose, with federal government consumption rising 9.9% in the third quarter. Military spending saw the strongest growth. National defense spending rose 16%, compared to a 0.4% increase in non-defense spending. State and local governments trailed the Federal government, growing spending only 1.1% in the third quarter.

The private sector helped fixed investment spending rise at a strong but decelerating clip, as nonresidential fixed investment rose 8.9% in the third quarter, compared to 9.7% in the second quarter. Equipment investment saw the largest growth, rising 11%.

Housing Improvements

After existing home sales disappointed on Monday with a seasonally adjusted sales rate 6.1% decline, according to the National Association of Realtors, the Federal Housing Finance Agency (FHFA) announced that home prices rose 0.6% on a month-over-month basis, indicating demand for housing has remained strong despite the decline in total transactions.

On a year-over-year basis, home sales rose 4.5% in October 2014, although the total U.S. index for home prices remains 5.1% below the peak in April 2007. Current price levels are “roughly the same” as levels in September 2005, the FHFA said in a statement.

Regional variations were strong, with the Pacific area seeing 6% increase in prices on a 12-month basis, and the Middle Atlantic area seeing a 0.8% increase. However, on monthly basis Pacific prices fell 0.5%. Annualized changes were all positive.

Economists have expected housing price gains to decelerate throughout 2014, which has been the case from May to October on an unadjusted basis. Seasonally adjusted price changes have remained more consistent, and positive, throughout 2014.