U.S. GDP Growth Revised Up to Strongest Expansion in Two Years

WASHINGTON�U.S. economic growth last quarter was stronger than initially thought and corporate profits rose, signs of continued health in the world's largest economy.

Gross domestic product, a broad measure of the goods and services produced across the economy, expanded at an inflation- and seasonally adjusted annual rate of 3.2% in the third quarter, the strongest growth in two years, the Commerce Department said Tuesday.

Economists surveyed by The Wall Street Journal expected growth would be revised up to a 3.0% pace from last month's initial estimate of 2.9%. Growth accelerated from the second quarter's more modest 1.4% pace.

The latest data showed stronger consumer spending over the summer compared with the government's initial estimate, but business investment was weaker than earlier thought.

Tuesday's report also showed that a key measure of U.S. corporate profits increased for the third consecutive quarter. Profits after tax, without inventory valuation and capital consumption adjustments, rose 3.5% from the second quarter to a seasonally adjusted annual rate of $1.694 trillion in the third quarter.

Compared with a year earlier, after-tax profits rose 5.2% last quarter, the strongest annual reading since the fourth quarter of 2012.

An alternative measure of business earnings, pretax profits with inventory valuation and capital consumption adjustments, rose 6.6% in the third quarter from the prior period and was up 2.8% on the year.

Corporate profits have been pressured in recent years by various forces including weak global growth, a strong dollar that damps demand for U.S. exports and slumping commodity prices that battered the energy and agriculture sectors. But business earnings have shown signs of stabilization this year as some of those headwinds faded.

"Based on available reports and analysts' estimates, aggregate corporate earnings per share appeared to continue to rebound in the third quarter, reflecting improvements across a wide range of industries, including the energy sector," noted the minutes, released last week, of the Federal Reserve's Nov. 1-2 policy meeting.

U.S. economic growth accelerated in the third quarter following modest growth in late 2015 and early 2016. Output climbed 1.6% in the third quarter from a year earlier, up from annual growth of 1.3% in the second quarter.

Fed Chairwoman Janet Yellen told lawmakers earlier this month that "the pickup reflected some rebuilding of inventories and a surge in soybean exports" as well as "moderate gains" for consumer spending, though she also flagged continued weakness in business investment and manufacturing output.

Consumer spending, which accounts for more than two-thirds of U.S. economic output, rose at a 2.8% annual rate in the third quarter, according to Tuesday's report. That was up from an earlier estimate of 2.1% growth, though still a slowdown from the second quarter's robust 4.3% growth rate for household outlays.

A measure of business spending, fixed nonresidential investment, rose at a weak 0.1% pace last quarter versus an earlier estimate of 1.2% growth. Business investment in structures rose more than earlier estimated, but growth in spending on intellectual property products like software and research and development was weaker than earlier thought, and spending on equipment declined more sharply than previously estimated.

Net exports and inventories helped boost GDP growth in the third quarter, while a pullback in residential investment was a drag on the broader economy. A rise in federal-government outlays was mostly offset by a drop in spending by state and local governments.

Looking forward, economists expect continued growth in the final three months of 2016. Forecasting firm Macroeconomic Advisers last week projected GDP growth at a 1.8% annual rate in the fourth quarter, while the Federal Reserve Bank of Atlanta's GDPNow model estimated growth at a stronger 3.6% rate in the October-to-December period.

Economic growth in the coming years could be boosted by fiscal stimulus, according to some forecasters. Republicans next year will control both Congress and the White House, and President-elect Donald Trump has said he hopes to enact an overhaul of the tax code and an infrastructure-investment program.

With unemployment hovering around 5% for more than a year and long-sluggish U.S. inflation appearing to firm, the Fed is widely expected to raise short-term interest rates at its upcoming Dec. 13-14 meeting, barring unexpected developments in economic data or financial markets. The central bank has held its benchmark federal-funds rate at a range of 0.25% to 0.50% since December 2015.

The Commerce Department will release additional revisions for third-quarter GDP and corporate-profits data on Dec. 22. The agency will release its first estimate for fourth-quarter GDP on Jan. 27.

Write to Ben Leubsdorf at ben.leubsdorf@wsj.com and Jeffrey Sparshott at jeffrey.sparshott@wsj.com