Economy

Dow hits record high as economic growth pegged at 5 percent

Diane Shannon shops for toys on Black Friday with her daughter Davadia, 5, right, and Darladia, 4, at Target, Nov. 28, 2014 in Chicago.
Diane Shannon shops for toys on Black Friday with her daughter Davadia, 5, right, and Darladia, 4, at Target, Nov. 28, 2014 in Chicago. TNS

The nation’s economy grew at an unexpectedly strong 5 percent in the third quarter, buoyed by an uptick in personal spending and an increase in wages that has outpaced inflation, the government announced Tuesday.

The figures, from the U.S. Bureau of Economic Analysis, reflected a significant increase from earlier estimates of third-quarter gross domestic product growth. The revision, based on more complete information, showed stronger figures for personal consumption, one of the largest drivers of the U.S. economy.

“The economy is in full swing,” said Mark Zandi, the chief economist for forecaster Moody’s Analytics. “It’s finally pulling away from the dark pull of the Great Recession. . . . The economy now is fully engaged – we’re off and running.”

The White House celebrated the announcement, noting that the economy grew in the third quarter at its fastest pace in more than a decade.

Financial markets cheered the numbers as well, with the Dow Jones Industrial Average closing at 18,024, the first close above 18,000 in history, and the S&P 500 also posting a record high, closing at 2,082. The NASDAQ inched down slightly, but all three indexes have been on a tear in the last week after tumbling briefly in the first part of the month.

Other economic indicators – including steady-if-sluggish labor-market growth – have been generally positive. The White House said 2014 is ending up as a “breakthrough year for the United States” on key middle-class indicators.

“The steps that we took early on to rescue our economy and rebuild it on a new foundation helped make 2014 already the strongest year for job growth since the 1990s,” Jason Furman, chairman of President Barack Obama’s Council of Economic Advisers, said in a statement. Even so, he cautioned there was “more work to be done to ensure that all Americans can share in the accelerating recovery.”

The 5 percent annualized growth rate in the third quarter is the highest of any quarter since 2003, and it was also the first time since 2003 that growth topped 4 percent for two consecutive quarters.

Beyond that, it came in a year that started rough: In the first quarter, GDP dropped after 11 quarters of growth, dragged down by unusually severe winter weather that slowed sales and discouraged businesses from stocking their shelves and warehouses.

At the time, economists weren’t sure whether those first-quarter problems would prove fleeting – or a longer-term drag.

Zandi, from Moody’s, said the first-quarter slowdown turned out to have been an aberration, partly because of the bad weather. What changed in later months is that businesses reached what he called “a ‘Field of Dreams’ moment” in which they stopped focusing so much on costs and began thinking about growth.

“That ‘Field of Dreams’ moment always happens after a recession,” he said. “It just took a long time this time around.”

Tuesday’s numbers, the White House said, “indicate a solid underlying trend of recovery.”

Among other indicators compiled by the White House, yearly growth in real average hourly earnings are up for the second year in a row, after two years of decline; consumer sentiment, as measured in surveys, is at levels not seen since 2007, before the nation slipped into a crippling financial crisis and recession; average monthly job growth is at the highest level of the past five years; auto sales are up; and underwater mortgages, where the amount owed is more than the property’s worth, are down.

GDP is the widely watched measure of the nation’s economy, providing a measure of all goods and services produced. A unit of the Commerce Department calculates the figure, releasing an initial estimate followed by two revisions. Private-sector economists offer their own expectation on the figure as well.

The figure released Tuesday was the second revision.

Gus Faucher, a vice president and senior macroeconomist of the PNC Financial Services Group, called the GDP revision a “welcome holiday surprise.”

As Faucher pointed out, the estimates for third-quarter growth have steadily risen, from 3.5 percent initially to 3.9 percent and now to 5 percent.

The big takeaway, Faucher said in an interview, is that the economy is growing fast enough to absorb the leftover slack from the recession.

“We have job growth, which leads to income growth, which leads to consumer spending growth, which leads to more job growth,” he said. “We are in a positive, self-reinforcing cycle.”

And while growth is destined to slow next year, it should remain strong enough so that potential economic headwinds – such as struggling economies in Europe and Japan – won’t derail it, he said.

In a research note, Lindsey M. Piegza, chief economist of the wealth management and investment banking firm Sterne Agee, said a big reason for the boost in consumer confidence is a dramatic drop in gas prices – which instantly puts money into people’s pockets.

“Consumers are feeling wealthier and are more willing to go out and spend on goods and services,” she wrote. She added: “Consumers are feeling as confident as ever, or at least the most confident since 2007. . . . Heading into the final days of the year, there is plenty of merry for the holidays.”

  Comments