By Lucia Mutikani
WASHINGTON (Reuters) - The U.S. economy grew at a healthier clip in the third quarter than initially thought, but strong inventory accumulation by businesses could temper expectations of an acceleration in growth in the final three months of the year.
The Commerce Department on Tuesday said the nation's gross domestic product grew at a 2.1 percent annual pace, not the 1.5 percent rate it reported last month, as businesses reduced an inventory bloat less aggressively than previously believed.
The pace of economic growth, which was also boosted by upward revisions to business spending on equipment, suggests a resilience that could help give the Federal Reserve confidence to raise interest rates next month.
While consumer spending was revised down a bit, its pace remained brisk, suggesting consumers were cash-flush.
"The economy continues to move along at a good clip relative to its potential. With growth like this, the Fed has the data it needs to light the candle finally and lift off on December 16," said Chris Rupkey, chief financial economist at MUFG Union Bank in New York.
When measured from the income side, the economy grew at a sturdy 3.1 percent clip, the fastest in a year and an acceleration from the second quarter's upwardly 2.2 percent pace. Wages and salaries increased $109.3 billion, $61.6 billion more than initially estimated.
The third-quarter's respectable expansion should set up the economy to achieve at least 2 percent growth in the second half of the year, around its long-run potential. In the wake of robust job growth in October and strong domestic demand, the Fed is expected to raise rates at its Dec. 15-16 policy meeting.
Other data on Tuesday showed consumer confidence fell further in November, hitting a 14-month low, as sentiment towards the labor market surprisingly soured. Economists suspected the Nov. 13 attacks in Paris and rising tensions in the Middle East had weighed on consumer confidence.
Despite the drop, more consumers say they plan to buy homes, automobiles and other big-ticket items over the next six months.
"The bigger picture suggests that domestic demand is still firm, spending plans are evolving positively and the housing market continues to post gains," said Robert Kavcic, a senior economist at BMO Capital Markets in Toronto.
A third report showed house prices rose solidly in August.
U.S. financial markers were little moved by the data as investors worried about global security after Turkey shot down a Russian warplane.
LARGE INVENTORY ACCUMULATION
In the third quarter, businesses accumulated $90.2 billion worth of inventories, instead of the $56.8 billion reported last month. That followed more than $100 billion worth of inventories accumulated in each of the prior two quarters.
As a result, the change in inventories chopped off only 0.59 percentage point from third-quarter GDP growth, rather than the 1.44 percentage points the government reported in October.
That, however, suggests inventories could be a drag on fourth-quarter growth.
"The bigger inventory overhang helps explain why manufacturing sentiment remains cautious early in the fourth quarter, and does present downside risk to our 2.5 percent estimate for current-quarter GDP growth," said Michael Feroli, an economist at JPMorgan in New York.
Consumer spending, which accounts for more than two-thirds of U.S. economic activity, grew at a still strong 3.0 percent rate in the third quarter, down from the 3.2 percent rate estimated last month. The downward revisions mostly reflected weak outlays on communication services and utilities.
A measure of private domestic demand, which excludes trade, inventories and government spending, was revised down to a still sturdy 3.1 percent pace from the previously 3.2 percent rate.
Though there are signs consumer spending slowed early in the fourth quarter, it should continue to be supported by strong income gains. Income at the disposal of households after adjusting for inflation rose at a robust 3.9 percent pace in the third quarter.
A trade deficit that was larger than previously estimated subtracted 0.22 percentage point from GDP growth in the third quarter. Data on Tuesday showing a smaller goods trade deficit suggested trade would contribute to fourth-quarter growth.
Deep spending cuts by energy firms following a collapse in oil prices continued to weigh on growth. Spending on mining exploration, wells and shafts tumbled at a 47.1 percent rate, rather than the 46.9 percent pace reported last month.
However, business spending on equipment was revised up to a 9.5 percent rate from a 5.3 percent pace.
The Commerce Department also reported that corporate profits after tax fell at a 1.6 percent rate in the third quarter after rising at a 2.6 percent pace in the second quarter. Profits, which have been undercut by the dollar's strength and lower oil prices, were down 8.1 percent from a year ago, the biggest decline since the fourth quarter of 2008.
(Reporting by Lucia Mutikani; Editing by Paul Simao)