The Commerce Department revised sharply upward its first estimate of 2.8 percent annualized growth for the July-September quarter.
Most analysts had expected a more modest upward revision to 3.0 percent for the third quarter after 2.5 percent growth in the second quarter.
Some analysts are expecting a sharp slowdown in the fourth quarter after a 16-day partial government shutdown in October over a budget impasse that furloughed hundreds of thousands of federal workers.
Inventory investment led the third-quarter increase, adding 1.7 percentage points to the headline number for gross domestic product growth. Increases in final sales — GDP less inventory investment — slowed to 1.9 percent from 2.1 percent in the second quarter.
The headline third-quarter GDP reading was the fastest growth since the 2012 first quarter’s 3.7 percent pace. Year-on-year, the economy has expanded just 1.8 percent from the third quarter in 2012.
Analysts pointed out the growth number masked some weak details, including downward revisions to housing and also to consumer spending, which accounts for about two-thirds of US economic activity.
“Unfortunately, all the revision, plus a bit more, was in the inventory component, while final sales were revised down a tenth to 1.9 percent. There’s no momentum here,” said Ian Shepherdson of Pantheon Economics.
“We know that the current quarter started on a weaker footing,” added Jennifer Lee of BMO Capital Markets.
The pace of build-up in inventories is unsustainable and will have to slow in the coming quarters, but would likely be offset by stronger final sales, said Jim O’Sullivan of High Frequency Economics.
But O’Sullivan said there was no sign in the ISM purchasing managers surveys or employment data of any significant slowing in overall growth in the fourth quarter.
“We believe GDP has been undercounted, at least prior to Q3,” he said.
The report came as the Federal Reserve weighs whether the economy is strong enough to allow it to begin scaling back its massive monetary stimulus, aimed at holding down long-term interest rates and bolstering growth.
The central bank will review its $85 billion a month asset-purchase program at its December 17-18 policy meeting.
Key factors in the Fed’s decision to taper will be a significantly improving jobs picture and still-tame inflation.
The GDP data came a day ahead of the Labor Department’s November jobs report. Analysts on average expect job growth slowed to 188,000 from 204,000 in October, and the unemployment rate will dip a tenth point to 7.2 percent.
The Commerce Department report showed a pick-up in inflation from the second quarter, but it was still in the Fed’s comfort zone.
The price index for personal consumption expenditures rose 2.0 percent in the third quarter, just in line with the Fed’s target. The index excluding volatile food and energy prices increased only 1.5 percent.
Even if the fourth quarter is slow, analysts generally are penciling a rebound in 2014.
“The federal shutdown and political brinkmanship around the Treasury debt ceiling hurt the economy, but in the fourth quarter, not the third. The hit to fourth quarter real GDP is estimated at $20 billion, equal to half a percentage point of growth,” said Scott Hoyt of Moody’s Analytics.
“For growth to accelerate as anticipated next year, lawmakers must do no harm during the next round of budget negotiations, and the Federal Reserve must manage long-term rates higher as the job market improves. This is doable, and thus the most likely scenario, but threats to the outlook are clear.”