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Washington (AFP) – The U.S. economy grew at a stronger-than-expected pace in the third quarter, lifted by lower imports and a surge in defense spending, according to government data released Thursday.

The world’s largest economy expanded at an annual rate of 3.5 percent in the July-September period, the Commerce Department said in its first estimate for the quarter.

Economists had expected third-quarter growth would come in slower, with the consensus estimate at 3.0 percent, after the robust 4.6 percent expansion in the second quarter. The economy contracted 2.1 percent in the first quarter largely due to severe winter weather.

The report came a day after the Federal Reserve ended its asset-purchase program, revealing increasing confidence in a modestly expanding economy and citing “substantial improvement” in the labor market.

“Growth above three percent in four of the past five quarters is starting to look like a trend,” said Ian Shepherdson of Pantheon Macroeconomics.

“If growth continues at this pace — we think it will — the first Fed tightening could easily come in the spring, especially if wage gains start to pick up.”

The deceleration in growth from the second quarter principally was due to slower business investment.

The economy’s key driver, consumer spending, also cooled, rising 1.8 percent after increasing 2.5 percent in the prior quarter.

Disposable personal income grew 2.7 percent, down from a 4.4 percent rise in the second quarter.

A shrinking trade deficit added 1.32 percentage point to growth, the best gain since the 2009 second quarter. Exports of goods and services increased 7.8 percent, while imports fell 1.7 percent.

Federal government spending increased a hefty 10.0 percent, led by a 16 percent surge in defense spending.

Inflation slowed in the second quarter to well below the Fed’s 2.0 percent comfort zone. The personal consumption expenditures price index, the central bank’s preferred inflation measure, fell to 1.2 percent from 2.3 percent in the prior quarter.

“Looking through the quarterly volatility, caused to a large extent by inventories and trade, consumer spending will remain the main growth engine of the US economy. It should be well supported by the ongoing improvement in the labor market, and the anticipated pick-up in wages,” said Harm Bandholz of UniCredit Economics.

AFP Photo/Paul J. Richards

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