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Economy Grew at Fastest Pace in Two Years

The U.S. economy grew at its fastest pace in two years in the third quarter as a surge in exports and a rebound in inventory investment offset a slowdown in consumer spending.

Gross domestic product increased at a 2.9 percent annual rate after rising at a 1.4 percent pace in the second quarter, the Commerce Department said on Friday in its first estimate.

That was the strongest growth rate since the third quarter of 2014 and beat economists' expectations for a 2.5 percent expansion pace. Business investment improved last quarter, though spending on equipment remained weak.

Despite the moderation in consumer spending, the third-quarter rise in growth could help dispel any lingering fears the economy was at risk of stalling. Over the first half of the year, growth had averaged just 1.1 percent.

Election faltering

"This shows that the U.S. is roughly on track. It's a natural bounce back following a pretty underwhelming year so far," said Luke Bartholomew, fixed income investment manager at Aberdeen Asset Management in London. "The election campaign has probably created a degree of uncertainty that has impacted growth."

Though the Federal Reserve is mostly focused on employment and inflation, signs of economic strength would be supportive of an interest rate hike in December. The U.S. central bank raised its benchmark overnight interest rate last December for the first time in nearly a decade.

The dollar rose to a three-month high against the yen on the report, while prices for U.S. government bonds fell. U.S. stock index futures were little changed.

Consumer spending slowdown

Consumer spending still supported the economy in the third quarter, even as the pace slowed from the second quarter's robust 4.3 percent rate. Consumer spending, which accounts for more than two-thirds of U.S. economic activity, increased at a 2.1 percent rate.

Spending was held back by a decline in purchases of goods which are not meant to last long. With a tightening labor market generating a steady increases in wages and strong household balance sheets, spending could accelerate in the fourth quarter.

Data on Friday from the Labor Department showed labor costs rose 0.6 percent in the third quarter after a similar gain in the second quarter, leaving the year-on-year rate of increase at 2.3 percent.