WASHINGTON — The U.S. economy grew at a 2.7 percent annual rate from July through September, much faster than first thought.
The strength is expected to fade in the final months of the year because of the impact of Superstorm Sandy and uncertainty about looming tax increases and cuts in government spending.
The Commerce Department said Thursday that growth in the third quarter was significantly better than the 2 percent rate estimated a month ago. And it was more than twice the 1.3 percent rate reported for the April-June quarter.
The main reason for the upward revision to the gross domestic product was businesses restocked at a faster pace than previously estimated. That offset weaker consumer spending growth.
GDP measures the nation's total output of goods and services — from restaurant meals and haircuts to airplanes, appliances and highways.
Most economists say economic growth is slowing to below 2 percent in the current October-December quarter. That's generally considered too weak to rapidly lower the unemployment rate.
Paul Ashworth, chief U.S. economist at Capital Economics, said companies are likely restocking more slowly now. Businesses typically cut back on restocking when they think consumers will spend less. Consumer spending drives roughly 70 percent of economic activity.
Meanwhile, consumers and businesses appeared to be more cautious over the summer, according to the GDP report.
Consumer spending grew at a weaker 1.4 percent rate in the third quarter, down from the 2 percent rate estimated a month ago and nearly in line with the 1.5 percent rate in the second quarter.
Business spending on equipment and software fell at an annual rate of 2.7 percent in the third quarter, the first decline since the depths of the recession in April-June 2009.
The report showed continued strength in homebuilding, which rose at an annual rate of 14.2 percent. And government spending expanded at an annual rate of 3.5 percent, marking its first positive contribution to overall economic growth in two years. The rise was driven by a big jump in military spending.
While economists predict slower growth in the final months of the year, several reports suggest economic activity picked up in October and early November.
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Spending could be weak
Economists cite two reasons for the anticipated weakness in consumer and business spending:
• Spending may weaken in the final weeks of the year if lawmakers and President Barack Obama fail to reach a deal to avoid the “fiscal cliff.” That's the name for tax increases and spending cuts that would occur in January without a deal.