Economy grew 2.8% in the third quarter

The economy grew at a 2.8% annual rate in the third quarter, an unexpectedly strong performance that defied predictions that slowing growth in new home sales over the summer and the threat of a government shutdown were cutting into growth.

The performance beat the average estimate of 2% annualized growth, as predicted in a survey of economists conducted by Bloomberg News. It represents an acceleration from 2.5% growth in the second quarter.

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The details of the numbers are weaker than the headline figure, said David Berson, chief economist at Nationwide Insurance. About a quarter of the gain came from an unanticipated buildup in inventories, he said. Growth in consumer spending was slower than in the second quarter, and investment in housing decelerated as interest rates rose, he said. Factoring out the inventory gains, the economy grew at a 2% rate in the quarter, pretty much as forecast, he said.

“If you look closely, what all this says is that we're probably set up for a weaker fourth-quarter number.”

— David Berson, chief economist at Nationwide

"If you look closely, what all this says is that we're probably set up for a weaker fourth-quarter number,'' Berson said. "We're at 1.5%":

The big gain was partly driven by a 9.5% jump in private investment, and a tripling of the gain in state and local government spending, which rose at a 1.5% annual rate, the Commerce Department said. State and local spending has fallen every year since 2009. Consumer spending actually rose more slowly than in the second quarter, advancing at a pace of only 1.5% a year, the government said. The investment gains were concentrated in real estate, with business spending on productivity-enhancing new equipment falling

Inflation picked up during the quarter, but remained below the levels the Federal Reserve has set as a guideline for potential tightening of monetary policy. Inflation reached a 1.8% annual rate, in! cluding 1.5% after excluding volatile food and energy prices. The Fed has set an inflation target of 2%.