US economy grew 2.1% in third quarter

The US economy grew more strongly than first thought in the third quarter on higher investments in businesses and housing that offset a bit less momentum in key consumer spending.

In the July to September quarter, gross domestic product -- the broad measure of the economy's output of goods and services -- expanded at a 2.1 percent annual pace, the Commerce Department said.

GDP growth in the quarter was initially estimated at 1.5 percent, and though now seen stronger, it still marked a slowdown from the robust 3.9 percent expansion in the second quarter.

The upward revision was slightly higher than analysts expected, but overall the fresh data was less positive. The revision was largely due to a smaller decrease in private inventory investment from the second quarter than previously estimated, which offset downward revisions, notably to consumer spending.

The report came three weeks before the Federal Reserve holds its final monetary policy meeting of the year. Market expectations are high that the Fed will raise its benchmark interest rates on December 16 from near zero, where they have been pegged since December 2008 to support the economy's recovery from the Great Recession.

"Bottom line: Stronger growth but a weaker mix, with the biggest changes in inventories, revised up, and consumption, revised down," said Chris Low of FTN Financial.

"From the Fed's perspective, the revision doesn't mean much. It's strong enough to allow a rate hike, but not strong enough to demand one," Low said.

- Plow-horse economy -

Though growth has been volatile this year, with only a 0.6 percent rise in the first quarter, the overall pace has been that of a plow-horse economy, plugging along despite a global slowdown.

Consumer spending, which drives about two-thirds of the activity in the US economy, rose 3.0 percent in the third quarter, a notch less than the 3.2 percent previously estimated.

Business investments grew 2.4 percent, three tenths more than previously estimated. Investments in housing jumped 7.3 percent, revised up from 6.1 percent.

The Obama administration highlighted the growth in investment in the housing market, one of the bright spots of the economy.

"Over the past four quarters, residential investment has grown 9.2 percent -- the strongest four-quarter growth rate since the bounce-back from the financial crisis in 2012 and 2013," said Jason Furman, head of the president's Council of Economic Advisers.

"Housing demand is expected to continue to strengthen as household formation rises, credit availability improves, and the labor market continues to strengthen."

Exports were weaker than previously thought, rising only 0.9 percent after a 5.1 percent jump in the second quarter.

By contrast, imports, which represent a drag on GDP growth, increased 2.1 percent as the stronger dollar kept import costs relatively low.

Inflation has remained muted amid the recovery, in part due to falling oil prices. The personal consumption expenditures price index, closely watched by the Fed, rose at an annual rate of 1.3 percent in the third quarter.

That was a tenth point higher than previously estimated, but inflation nevertheless remained well below the central bank's target of 2.0 percent for price stability.

"The details of the revision to GDP made the composition a bit less favorable, but even a 2.7 percent pace for real final sales is solid. We continue to forecast a 2.7 percent pace for overall real GDP in Q4," said Jim O'Sullivan, chief US economist at High Frequency Economics.

The government will publish its final estimate for third-quarter GDP on December 22, a week after the Fed's December 15-16 meeting.

The central bank has forecast US economic growth of 2.1 percent in 2015, cooling somewhat from the 2.4 percent expansion in 2014.