Market analysts predicted a growth rate of 2% for the three months to September, following recent fears that global market contagion had begun to spill over to the US and other Western economies.

Growth slumped in the second quarter to an annual rate of 1.8%, down from 5.5% in the first quarter as momentum slowed in response to slumping exports to crisis-hit Asia.

Rate-cut rethink?

The stronger-than-expected third quarter growth is likely to lead to a reappraisal of the state of the economy by the Federal Reserve bank which has moved to cut interest rates by half a percentage point in two stages over the last month in response to the perceived threat to growth.

Meanwhile, a measure of inflation linked to gross domestic product gained just 0.8% in the third quarter, the lowest level since 1963 and down from 0.9% in the second quarter.

Exports recovering

The Asian financial crisis proved to be much less of a drag on economic growth in the third quarter than it had been in the first half of the year, according to the US Commerce Department.

Exports declined 2.9% in the third quarter, compared with a 7.7% decline in the second. Imports rose 3.4%, down from 9.3%.

Business inventories rose sharply while consumer spending continued to grow strongly, but at a lesser rate than a surge the previous quarter.

Economic growth is measured as the annual rate of increase in gross domestic product, or GDP.