Annual growth of 3.5% stronger than the 3% forecast, boosted by a rise in exports and government defence spending

The US economy grew faster than expected in the third quarter, boosted by a rise in exports and a jump in government defence spending.

Annual growth of 3.5% was stronger than the 3% forecast by economists although a slowdown from the 4.6% pace in the second quarter when activity rebounded after the disruption of severe winter storms in the early months of the year.

An improved trade performance contributed to growth between July and September, with export growth of 7.8% outpacing imports, which fell by 1.7%.

Government spending rose by 10%, following a 16% boost to defence spending, according to the data from the US Bureau of Economic Analysis.

Defence spending added 0.66 percentage points to the growth figure, increasing at its fastest rate for five years as the US mounted air strikes against Islamic State militants in Syria and Iraq.

However, the pace of growth in business investment, housing and consumer spending slowed from the second quarter, economists said. Consumer spending growth slipped to 1.8% from 2.5% in the previous three months. Fixed investment slowed to 4.7% from 9.5%.

"The report was broadly constructive, but with weakness emerging in housing and consumption spending, we expect the pace of growth to slip further in the fourth quarter," said Millan Mulraine, deputy chief economist at TD Securities in New York.

The better-than-expected overall growth figure echoed the upbeat assessment on the US economy from the Federal Reserve chair, Janet Yellen, a day earlier. Calling time on the central bank's $4.5tn bond-buying programme, the Federal Open Market Committee (FOMC) suggested recovery was on track with the economy expanding at a "moderate pace".

Monetary policy would remain loose, it said, with interest rates likely to remain at a record low range of 0% to 0.25% for a "considerable time".

However, the growth figures and upbeat assessment raised expectations the Fed might increase rates sooner rather than later, sending the dollar to its highest level in more than three weeks against a basket of currencies.

"The current and projected pace of economic growth is one of the reasons why we still expect the Fed to begin hiking interest rates earlier next year than is widely appreciated, with an increase next March still a distinct possibility," said Paul Ashworth, chief US economist at Capital Economics.

Investors were feeling cautious as they considered the consequences of the third-quarter growth figures and the FOMC's statement. US markets opened slightly lower before regaining ground. The Dow Jones Industrial Average was up 0.9% and the S&P 500 was up 0.2%. In the UK, the FTSE 100 was roughly flat.

The International Monetary Fund has forecast the US economy will grow by 2.2% in 2014 overall, the same rate as 2013, and by 3.1% in 2015.

Nancy Curtin, chief investment officer of Close Brothers Asset Management, said: "Our view that the US is recovering but not strong enough to trigger a reassessment of still benign monetary policy. The slow path to rate rises in 2015 remains. US growth is good for the world and augurs well for continued improvement in US earnings as we head into the fourth quarter." Anna Stupnytska, global economist at Fidelity Worldwide Investment, said the Fed would be in no hurry to raise borrowing costs in the absence of inflationary or wage pressures. US inflation is currently running at 1.7% on the consumer price index and is expected to fall further as lower oil prices feed through.