U.S. economy accelerates and helps lift Dow to 18K

WASHINGTON - A surge in U.S. economic growth lifted stocks Tuesday to record highs and showed that the United States is putting distance between itself and struggling economies around the world.

Fueled by hiring gains, cheaper gas, and rising confidence, consumers and businesses drove growth to a sizzling 5 percent annual rate last quarter. Though the economy is likely cooling a bit, its solid pace is brightening hopes for 2015.

The economic strength could also shape the Federal Reserve's timetable for raising interest rates from record lows.

The government's third and final estimate of growth for the July-September period was the strongest for any quarter in 11 years. The result cheered investors. The Dow Jones industrial average ended the day up 64.73 points to 18,024.17, the first time it has closed above 18,000.

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, which have helped keep overall inflation ultralow. Gas prices have fallen for 88 straight days, according to AAA - the longest consecutive decline on record. Cheaper gas has acted like a tax cut to free up money for Americans to spend on other items, including cars, clothes and appliances.

Last quarter's growth 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 by 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," said Gus Faucher, senior economist at PNC Financial Services Group. "Growth should remain good next year, with lower gasoline prices a big plus for consumers."

Since the recession officially ended in June 2009, the economy has struggled to regain full health. Five years of growth have averaged an anemic 2.2 percent.

Tuesday's figures are sure to be closely studied by the Fed. Last week, the Fed ended a policy meeting by saying it would be "patient" in deciding when to raise rates because the economy was not 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, 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 lift inflation from excessively low levels.

The government's figures Tuesday showed that the inflation gauge the Fed most closely watches has risen just 1.2 percent over the last 12 months. Partly as a result, few analysts think Tuesday's figures will prompt the Fed to raise rates in early 2015.

"We don't see the Fed moving before June," said Doug Handler, chief economist at IHS Global Insight.

And when the Fed does begin raising rates, Handler and others think the increases will be gradual and have only a slight effect on growth.

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 point in the last eight years, buoyed by more jobs and falling gas prices.