U.S. growth picks up as restocking offsets weak spending

* Third-quarter GDP grows at 2.8 percent rate, fastest in a

year

* Inventory build, weak imports lift output

* Consumer, business spending lose momentum

* Data points to underlying sluggishness in economy

By Lucia Mutikani

WASHINGTON, Nov 7 (Reuters) - U.S. economic growth

accelerated in the third quarter as businesses restocked

shelves, but the slowest expansion in consumer spending in two

years suggested an underlying loss of momentum.

Gross domestic product grew at a 2.8 percent annual rate,

the quickest pace in a year, after expanding at a 2.5 percent

clip in the second quarter, the Commerce Department said on

Thursday.

Inventories, however, accounted for a hefty 0.8 percentage

point of the advance made in the third quarter.

A gauge of domestic demand rose at just a 1.7 percent rate,

which economists said was insufficient to encourage the Federal

Reserve to trim its bond purchases. The Fed has been buying $85

billion in bonds each month to keep borrowing costs low.

"We haven't seen an acceleration in growth yet that the Fed

is looking for to begin tapering," said Joshua Dennerlein, an

economist at Bank of America Merrill Lynch in New York.

Economists had expected third-quarter growth to come in at a

2 percent pace.

Consumer spending, which accounts for more than two-thirds

of U.S. economic activity, expanded at a 1.5 percent rate, the

slowest pace since the second quarter of 2011. It grew at a 1.8

percent rate in the April-June period.

The slowdown in consumer spending suggests some of the

inventory accumulation by businesses was probably unnecessary.

That could force businesses to cut back on inventories,

which would weigh on what is already expected to be weak growth

in the fourth quarter because of the 16-day government shutdown

in October.

"Should demand accelerate heading into year end, businesses

should be better-positioned to meet that demand," said Jim

Baird, chief investment officer at Plante Moran Financial

Advisors in Kalamazoo, Michigan.

"However, in the absence of a surge, future production may

need to be trimmed to bring inventories back in line."

Economists at Goldman Sachs lowered their fourth-quarter GDP

estimate on the faster pace of inventory accumulation in the

third quarter. They now expect a growth rate of 1.5 percent,

rather than the previously estimated 2 percent pace.

HOUSEHOLDS, BUSINESSES CAUTIOUS

The weak consumer spending figure and a surprise interest

rate cut by the European Central Bank on Thursday lifted U.S.

Treasury debt prices. The dollar raced to a more than seven-week

high against the euro, but stocks on Wall Street fell.

Some of the slowdown in consumption in the third quarter

reflected weak demand for utilities because of unseasonably cool

weather. But households have also been wary of loosening their

purse strings given a slowdown in employment growth.

Though growth in household disposable income slowed to a 2.5

percent rate in the third quarter, the saving rate picked up to

4.7 percent, underscoring the caution among consumers.

A separate report from the Labor Department suggested the

jobs market continues to gradually improve. Initial claims for

state unemployment benefits fell 9,000 to a seasonally adjusted

336,000 last week.

The economy grew at a 1.8 percent rate in the first half of

2013, held back by a tightening in fiscal policy at the start of

the year.

Growth had been expected to gain speed in the fourth quarter

as the drag from fiscal policy lifted. Economists, however, now

estimate the partial shutdown of the federal government last

month will shave as much as 0.6 percentage point from GDP.

Fiscal policy is clouding an already uncertain economic

outlook and making businesses cautious about ramping up hiring.

The GDP report showed they are also holding back on spending

on capital goods. Overall business investment moderated in the

third quarter, as spending on equipment fell for the first time

in a year. Spending on nonresidential structures, including

mining and drilling, rose for a second consecutive quarter.

"The private sector decelerated over the summer, providing

less of a cushion than we would like for the government shutdown

in October," said Diane Swonk, chief economist at Mesirow

Financial in Chicago.

Apart from inventories, the economy got some support from a

slowdown in import growth, which limited the rise in the trade

deficit but also underscored the weakness of domestic demand.

Trade added 0.31 percentage point to growth.

Sturdy growth in spending by state and local authorities

pushed government spending up for the first time in a year, but

federal spending continued to drop.

The housing market appeared to weather a spike in mortgage

rates, with spending on residential construction increasing

strongly.