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Good Quarter Signals Better Growth Next Year

The economy has picked up some speed. Maybe it can maintain it.

Gross domestic product grew at a 2.9% annual rate in the third quarter, the Commerce Department reported Friday, significantly better than the 1.4% it posted in the second quarter and its fastest pace in two years. More important than that headline figure were the details of the report that suggest the economy may be achieving better balance.

Consumer spending has been the economy’s bulwark, as companies have hesitated to invest and government spending as a share of GDP fell to its lowest level since 1950. But even with steady job growth fueling income gains, Americans cannot act as the economy’s single engine indefinitely. Indeed, consumer spending was actually slower in the third quarter, growing at a 2.1% annual rate versus the second quarter’s torrid 4.3%.

With household finances in good shape and the unemployment rate at 5%, consumer spending will likely pick back up a bit. Still, with much of the post-recession pent-up demand for big-ticket items like cars now likely exhausted, it isn’t about to start running hot.

But at the corporate level, spending is showing some signs of life. Spending on nonresidential structures—office buildings, warehouses, oil wells and the like—grew at a 5.4% rate in the third quarter after falling 2.1% in the second. That suggests that the energy sector’s drag on business spending is starting to ease. Spending on equipment fell at a 2.7% rate, but this was actually the smallest drop of the year. It may be that with the removal of election uncertainty next month, companies will step up their spending on equipment in order to boost productivity and allay rising labor costs.

With both Hillary Clinton and Donald Trump proposing policies that would boost federal spending (Mrs. Clinton on things like infrastructure and education, Mr. Trump on things like border protection and defense), the long decline in government’s share of GDP may be coming to a close. In what most investors see as the likely scenario—a victory for Mrs. Clinton with Republicans hanging onto the House—some sort of modest budget package next year might be the best bet. That would nudge GDP upwards.

None of this argues the economy is about to surge. More things would have to come together, including a more substantial pickup in the housing market and a renewed focus on growth from U.S. companies, for that to happen. But the third quarter does signal a strong chance of better growth next year.

Write to Justin Lahart at Markets

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