Wall Street
Wall Street (AP Photo/Mark Lennihan)

WASHINGTON (AP) — The U.S. economy grew at a sizzling 5 percent annual rate last quarter, the fastest since 2003, fueled by consumer and business spending. The surge confirmed that the economy is steadily improving and outshining others around the world.

The news helped lift the Dow Jones industrial average above 18,000 for the first time. And it could shape the Federal Reserve’s decision on when to raise interest rates from record lows.

In early-afternoon trading, the Dow was up about 100 points.

In its report Tuesday, the government sharply upgraded third-quarter growth from its previous 3.9 percent estimate. Much of the increase came from consumer spending on health care and business spending on structures and software.

The economy has been benefiting from sinking energy prices. Gas prices have fallen for 88 straight days, according to AAA, the longest consecutive decline on record. That has freed up money for Americans to spend on other items, including cars, clothes and appliances.

Last quarter’s economic expansion was the fastest since summer 2003, and it followed a 4.6 percent annual rate in the April-June quarter. The government separately reported Tuesday that in November, consumer spending rose the most in three months and income the most in five months. Both figures brightened hopes for the 2015 economy.

“After four years of rocky recovery the U.S. economy is now hitting its stride, with a notable acceleration in growth in recent quarters,” said Gus Faucher, senior economist at PNC Financial Services Group. “And growth should remain good next year, with lower gasoline prices a big plus for consumers.”

Tuesday’s figures are sure to be closely studied by the Fed. Last week, the central bank ended a policy meeting by saying it would be “patient” in deciding when to raise rates because the economy wasn’t yet fully healthy. Many investors concluded that no rate hike was likely before mid-2015 at the earliest, and they drove stocks to record highs.

Unexpectedly strong expansion, though, could escalate pressure on the Fed to raise rates, even though inflation remains well below its 2 percent target. One reason the Fed has kept its benchmark short-term rate near zero since 2008 has been to try to raise inflation from excessively low levels.

The government’s figures Tuesday showed that the inflation gauge the Fed most closely monitors has risen just 1.2 percent over the past 12 months.

Also on Tuesday, the University of Michigan said its index of consumer sentiment found that U.S. consumers were more optimistic about the economy than at any other time in the past eight years, buoyed by more jobs and falling gas prices.

Two other reports Tuesday were more cautionary: The government said sales of new homes fell in November, evidence that job gains have yet to boost the housing sector. And it said factory orders for long-lasting manufactured goods slumped last month.

Still, the overall U.S. economy is showing resurgent strength and separating itself from others around the world. Europe is struggling to grow. So is Brazil. Japan has slid into recession. China is straining to manage a slowdown. Russia envisions a recession next year.

For the current October-December quarter, most analysts think the U.S. economy is slowing to an annual rate of around 2.5 percent. And they foresee growth around 3 percent in 2015. That would still be the strongest expansion since the economy grew 3.3 percent in 2005, two years before the Great Recession began.

The 2007-2009 downturn, the worst since the 1930s, destroyed millions of jobs. Since then, the economy has struggled to regain full health. Even after the recession officially ended in June 2009, the economy has turned in tepid growth averaging 2.2 percent annually.

But many economists think growth is set to accelerate as more businesses have grown confident about hiring. The country is on track to have its healthiest year for job growth since 1999. In November, employers added 321,000 jobs, the sharpest one-month increase in three years.

With more people working and having paychecks to spend, solid gains are expected in consumer spending, which accounts for about 70 percent of the economy.

For the third quarter, consumer spending grew at a 3.2 percent rate, the best showing this year and a full percentage point above the estimate the government made a month ago. The upward revision was driven by higher spending on health care.

Business investment spending rose at a 7.2 percent annual rate, 2.1 percentage points above the government’s previous estimate. Much of the new strength came from investment in structures and computer software.

The estimate released Tuesday was the government’s third and final look at third-quarter growth in gross domestic product — the value of all goods and services produced in the United States.

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