The U.S. economy expanded more than forecast in the third quarter, validating the optimism that prompted Federal Reserve policy makers to stop pumping money into financial markets.

Gross domestic product grew at a 3.5 percent annualized rate in the three months ended September after a 4.6 percent gain in the second quarter, Commerce Department figures showed today in Washington. It marked the strongest back-to-back readings since the last six months of 2003.

Government outlays and a shrinking trade deficit boosted growth last quarter, buying time for consumer spending in the world’s largest economy to strengthen asfuel prices drop and hiring picks up. Fed officials yesterday cited the improvement in the job market in deciding to end their bond-buying program and stay on course toward interest rate increases next year.

The economy “is on a firm footing, and if the labor market continues to get better, that’s the primary support to consumer spending,” said Brian Jones, a senior U.S. economist at Societe Generale in New York, who correctly forecast the growth in GDP. “The demand side of the equation was very healthy in the third quarter.”

The report is the last major economic indicator before next week’s mid-term election, in which Republicans are expected to expand their majority in the House and perhaps net the six seats they need to take control of the Senate.

David Fuller's view

Investors liked the 3Q GDP figures.  Wall Street was generally firm near its September highs and the US Dollar Index remains steady against European currencies.

Some commentators carp that while the Fed cushioned the recession, its policies have slowed the recovery.  I do not think the Fed is responsible for the slow recovery.  We can blame that on the severe credit crisis recession which was followed by a lengthy period of deleveraging, as I have mentioned on numerous occasions. 

The US is gradually and somewhat erratically improving, evidenced by GDP growth and employment figures, and many multinational corporations are doing considerably better than the national economy.  A business savvy White House in 2016 would unleash more US GDP potential.