​US stock market hits milestone following surge in economic growth

​US stock market hits milestone following surge in economic growth
The US stock market hit a historic milestone on Tuesday, following an announcement that the country’s economy grew five percent between the months of July and October ‒ its fastest pace in over a decade.

On Tuesday, the Commerce Department revised its third quarter gross domestic product (GDP) estimate upwards, citing stronger consumer and business spending than previously assumed. It was the fastest pace since the third quarter of 2003.

"Our economy is firing on most cylinders, whereas the global economy is essentially in dire need of a spark," Ryan Sweet, a senior economist at Moody's Analytics, told Reuters.

Previously, the economy was reported to have expanded at a 3.9 percent annual rate. The growth has now been revised up by a total of 1.5 percentage points since an initial estimate in October.

The government’s latest third-quarter GDP estimate rose “for all the right reasons, notably stronger domestic demand,” Diane Swonk, chief economist at Mesirow Financial, wrote in a blog post. “Indeed, depending on the outcome for the fourth quarter, growth for the year could now surpass 2.5 percent, which is much better than anyone expected just a month ago.”

The economy has been benefiting from sinking energy prices. Gas prices have fallen for 88 straight days, according to AAA, the longest consecutive decline on record. This has freed up money for Americans to spend on other items – including cars, clothes, and appliances, the Associated Press reported.

Much of the third quarter growth came from consumer spending, which accounts for about two-thirds of US economic activity. Consumer spending grew at an annual pace of 3.2 percent heading into the holiday season – the fastest rate since the fourth quarter of 2013.

"After four years of rocky recovery the US economy is now hitting its stride, with a notable acceleration in growth in recent quarters," said Gus Faucher, senior economist at PNC Financial Services Group. "And growth should remain good next year, with lower gasoline prices a big plus for consumers."

The government report on the state of the US economy sent stocks soaring to record levels. It came after last week's announcement that the Federal Reserve would be “patient” in deciding when to raise rates, because the economy wasn't yet fully healthy. On Tuesday, the Dow Jones Industrial Average topped 18,000 at the opening bell for the first time in history.

“The market was roaring yesterday, and going into the end of the year it keeps pushing higher,” Stephen Carl, principal and head equity trader at New York-based Williams Capital Group LP, said in a phone interview with Bloomberg on Tuesday. “The Fed is part of the fueling of everything, and you have to couple that with the year-end push.”

The unexpected growth rate could escalate pressure on the central bank to raise interest rates, which have remained near zero since 2008. Inflation remains well below the Fed’s two percent target ‒ the inflation gauge it most closely monitors has risen just 1.2 percent over the past 12 months ‒ so the central bank has been trying to “raise inflation from excessively low levels,” AP reported.

The Commerce Department also released a report on 'Non-defense Capital Goods Excluding Aircraft,' which is a closely watched proxy for business spending plans. Those orders were unchanged in November after a decline of 1.9 percent in October.

But economists – who had expected a strong rebound – largely shrugged off the data, which was at odds with sturdy readings on industrial production and fairly upbeat factory surveys, Reuters reported.

"We think this report paints an unrealistically bad picture of the current orders environment and payback is likely," said Tim Quinlan, an economist at Wells Fargo Securities.

The only major sector where the economy hasn’t been hot is real estate. The Commerce Department reported that sales of new single-family homes fell 1.6 percent from October – well below estimates of a small increase.