Residential construction increased at a 14.6% annualized rate, adding 0.4 percentage point to growth.
Government spending rose at a 0.2% pace, reflecting the biggest gain in state and local outlays since the second quarter of 2009.
Spending by federal agencies declined at a 1.7% pace. Estimates for federal spending reflect the effects of administrative furloughs associated with sequestration. Excluding the furloughs, U.S. government outlays would have been little changed in the quarter.
The report also showed price pressures remain contained. A measure of inflation, which is tied to consumer spending and strips out food and energy costs, climbed at a 1.4% annualized pace.
One bright spot for the economy this year has been motor vehicle sales as Americans take advantage of cheaper borrowing costs to replace older models. Purchases averaged 15.7 million at an annual rate in the third quarter, up from 15.5 million in the prior three months, according to Ward’s Automotive Group data.
Demand held up at the start of the fourth quarter for General Motors Co. and Ford Motor Co. as sales rebounded in the last few weeks of October. Cars and light trucks sold at a 15.2 million annual rate last month, matching the September pace.
“What we saw early in the month was some softness, but we were very encouraged when we saw the retail demand in the industry bounce back,” John Felice, Ford’s vice president of U.S. marketing, sales and service, said on a conference call.
While Americans are benefiting from a boost to wealth from rising stock prices and home values, a pickup in the pace of spending depends on bigger gains in employment and wages.
Payroll additions have slowed, averaging 143,000 from July through September. In the first half of the year, employment gains averaged 195,000. Labor Department figures due tomorrow are projected to show an increase of 120,000 for October, according to the Bloomberg survey median.
Economic growth this quarter will be less than economists projected at the start of the budget impasse that began Oct. 1. GDP will expand at a 2% annualized rate, according to the median projection in a Bloomberg survey on Oct. 31, down from a 2.4% forecast in an Oct. 4-9 survey.
The figure will reflect in a decline in government output, estimated by the number of hours put in by federal workers, as well as cutbacks at contractors, economists said.
The effect of the budget impasse on the economy, the recent slowdown in job growth and a pause in the housing market help explain why U.S. central bankers are continuing with $85 billion in monthly asset purchases.
“The recovery in the housing sector slowed somewhat in recent months,” the central bank said in the Oct. 30 release. “Fiscal policy is restraining economic growth.”