Economy charges ahead on consumer spending

The U.S. economy barreled ahead in the third quarter as consumers stepped up and spent more, keeping it on track for the best annual performance since 2005.

The government said Friday that the economy expanded at an annualized rate of 3.5 percent between July and September after the 4.2 percent pace in the previous quarter. But there were signs that the growth could cool in the coming months.

Businesses remain hesitant to increase spending, despite the large corporate tax cut enacted late last year. Some of the gains were also one-offs that could fade quickly, like the restocking of shelves at stores and warehouses, which contributed more than half the overall growth.

If there is a slowdown in the economy, it could further unsettle the markets, which have slumped in recent weeks. The S&P 500 fell 1.7 percent Friday and is down nearly 9 percent for the month.

Still, with 10 days to go before the midterm election, the headline number will be a valuable talking point for Republicans on the campaign trail. The second and third quarters represented the strongest back-to-back growth since 2014, and Republican leaders were quick to claim credit.

“Americans have more opportunity and more money in their pockets today than they did two years ago, and that’s in large part due to the reforms we’ve pushed forward,” said Rep. Erik Paulsen, R-Minn., chairman of the Joint Economic Committee.

Tax cuts for individuals and the budget deal early this year, which raised federal spending, helped elevate growth in the third quarter. Consumer spending increased 4 percent, and federal outlays rose 3.3 percent.

“There will come a day of reckoning for the economy after the money from the tax cuts is all gone,” said Chris Rupkey, chief financial economist at MUFG Union Bank, “but for today Washington really has something to crow about.”

The effect of the corporate tax cut was less evident. Businesses did not ramp up investment in equipment and factories — the kinds of things executives do when they anticipate the good times to continue.

Looking ahead, Michael Gapen, chief U.S. economist at Barclays, said he was not expecting a big rebound in business spending and “if you’re banking on strong GDP growth, you need business investment.”