The U.S. economy grew faster than initially thought in the third quarter as restocking by businesses provided a big boost, but consumer and business spending were revised lower in a sobering reminder of the recovery's underlying weakness.
Gross domestic product expanded at a 2.7 percent annual rate, the Commerce Department said on Thursday, as export growth also helped to offset the weakest consumer spending and first drop in business investment in more than a year.
While the growth pace was much quicker than the 2 percent rate the government estimated last month and the best since the fourth quarter of 2011, it was hardly a sign of strength as the lift from inventories will likely be lost in the fourth quarter.
The economy is also bracing for deep cuts in government spending and tax increases early next year, known as the fiscal cliff, which could suck $600 billion from the economy and fuel a fresh recession.
Economists polled by Reuters had expected GDP growth to be raised to a 2.8 percent pace.
"It is hard to have a strong economy when households are not hitting the malls hard and businesses have assumed the turtle position fearful of a crash due to the fiscal cliff," said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania.
A separate report from the Labor Department showed initial claims for state unemployment benefits dropped 23,000 to a seasonally adjusted 393,000, but still staying elevated after superstorm Sandy.
Economists fear the storm, which ripped through the East Coast in late October, could deal the labor market a setback this month, after employment growth accelerated in October.
"Employment growth could slow dramatically in November to around the 100,000 range," said Millan Mulraine, a senior economist at TD Securities in New York.
Employers added 171,000 jobs to their payrolls in October, up from 148,000 in September. The government will release its closely watched employment report for November on December 7.
Stocks on Wall Street opened high on optimism that lawmakers and Obama administration will reach an agreement on the fiscal cliff. Prices for longer-dated U.S. Treasury debt fell, while the dollar was weak against a basket of currencies.
INVENTORIES ADD, NOT SUBTRACT
Business inventories added 0.77 percentage point to third-quarter GDP growth. They were previously estimated to have subtracted 0.12 percentage point.
Excluding inventories, GDP rose at a revised 1.9 percent rate, underscoring sluggish demand. Final sales of goods and services produced in the United States had been previously estimated to have increased at a 2.1 percent pace.
A smaller trade deficit was also a factor behind the upward revision to GDP as export growth outpaced a rise in imports. But the trend in exports is unlikely to be sustained given slowing global demand, especially in China and debt troubled Europe.
Trade contributed 0.14 percentage point to GDP growth instead of subtracting 0.18 percentage point, as previously reported.
Other details of the report were rather weak. Consumer spending, which accounts for about 70 percent of U.S. economic activity, was lowered to a 1.4 percent growth rate - the slowest since the second quarter of 2011, from the 2 percent gain previously reported.
Consumer spending increased at a 1.5 percent rate in the second-quarter.
Business spending was revised to show much deeper cutbacks, which have been blamed on the fears of a tightening in fiscal policy next year. Business investment fell at a revised 2.2 percent rate instead of a 1.3 percent decline. That was the first drop since the first quarter of 2011.
Part of the drag in business investment, which had been a source of strength for the economy, came from equipment and software, where spending was the weakest since the second quarter of 2009.
The report also showed that after-tax corporate profits rose at a 3.3 percent rate in the third quarter after gaining 2.2 percent in the second quarter.
Spending on nonresidential structures contracted after five straight quarters of growth. Government investment was revised to a 3.5 percent growth rate from 3.7 percent as defense, and state and local government spending estimates were pared.
Growth in home building was trimmed to a 14.2 percent rate from 14.4 percent. Residential construction is benefiting from the Federal Reserve's ultra accommodative monetary policy stance, which has driven mortgage rates to record lows.
A third report showed contracts to buy previously owned U.S. homes surged in October, a sign the housing market recovery advanced into the fourth quarter despite a mammoth storm and concerns over looming tax hikes.
The National Association of Realtors said on Thursday its Pending Home Sales Index, based on contracts signed in October, gained 5.2 percent to 104.8.
(Additional reporting by Jason Lange; Editing by Neil Stempleman)