WASHINGTON—Corporate profits continued to rebound in the third quarter alongside solid growth in the broader U.S. economy.
The Commerce Department on Tuesday reported that a key measure of business earnings—profits after tax without inventory valuation and capital consumption adjustments—rose 3.5% from the second quarter, its third straight quarterly increase.
Compared with a year earlier, after-tax profits rose 5.2% in the third quarter, the first annual increase since late 2014 and the strongest growth since the fourth quarter of 2012.
"We had been anticipating a turnaround for profits as nominal growth picked up; but the firming, at least so far, looks more rapid and stronger than we had expected," J.P. Morgan Chase economist Daniel Silver said in a note to clients.
Tuesday's report also showed that 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.
That was up from last month's estimate that output rose at a 2.9% pace in the third quarter and beat economists' expectations for a revision up to 3% growth. The latest reading was boosted by stronger consumer spending, though business investment came in weaker than earlier estimated.
"The U.S. economy is in good shape in the second half of 2016," PNC Financial Services Group Deputy Chief Economist Gus Faucher said in a note to clients. "After some softness in late 2015 and early 2016, tied to an inventory correction and a downturn in energy production, growth has picked back up."
Business profits represented 9.1% of U.S. GDP in the third quarter, up from a recent low of 7.8% in late 2015 though down from the 10.2% average seen in 2012 through 2014.
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.
Business investment, though, remains a weak spot for the economy. One measure of capital expenditures, 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.
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 as concerns.
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. 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 on Tuesday projected GDP growth at a 1.9% annual rate in the fourth quarter.
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
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