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Economy picked up pace in third quarter, but 'fiscal cliff' looms

The U.S. economy grew faster than initially thought in the third quarter, but the momentum is unlikely to be sustained as the nation braces for deep cuts in government spending and tax increases early next year.

Gross domestic product expanded at a 2.7 percent annual rate, the Commerce Department said on Thursday, as faster inventory accumulation and export growth offset weak consumer spending and the first drop in business investment in more than a year.

While the growth pace was much quicker than the 2.0 percent rate the government estimated last month and the best since the fourth quarter of 2011, it was hardly a sign of strength in the economy given the boost from restocking and weaker consumer spending.

That will likely be lost in the fourth quarter and inventories may be a drag on growth, which is already being weighed down by fears of austerity, known as the fiscal cliff.

Lawmakers and the Obama administration are engaged in talks to avert the fiscal cliff, which could suck $600 billion from the economy and fuel a fresh recession.

Economists polled by Reuters had expected GDP growth to be raised to a 2.8 percent pace. Business inventories added 0.77 percentage point to third-quarter GDP growth. They were previously estimated to have subtracted 0.12 percentage point.

Excluding inventories, GDP rose at a revised 1.9 percent rate, underscoring sluggish demand. Final sales of goods and services produced in the United States had been previously estimated to have increased at a 2.1 percent pace.

Output during the July-September quarter was also revised up to show a smaller trade deficit as export growth outpaced the rise in imports. But the trend in exports is unlikely to be sustained given slowing global demand, especially in China and debt troubled Europe.

Trade contributed 0.14 percentage point to GDP growth instead of subtracting 0.18 percentage point, as previously reported.

Away from exports, details of the report were rather weak. Consumer spending, which accounts for about 70 percent of U.S. economic activity, was lowered to a 1.4 percent growth rate - the slowest since the second quarter of 2011, from the 2 percent gain previously reported.

Consumer spending increased at a 1.5 percent rate in the second-quarter.

Business spending was revised to show much deeper cutbacks, which have been blamed on the fears a tightening in fiscal policy next year. Business investment fell at a revised 2.2 percent rate instead of 1.3 percent decline. That was the first drop since the first quarter of 2011.

Part of the drag in business investment, which had been a source of strength for the economy, came from equipment and software, where spending was the weakest since the second quarter of 2009.

The report also showed that after-tax corporate profits rose at a 3.3 percent rate in the third quarter after gaining 2.2 percent in the second quarter.

Spending on nonresidential structures contracted after five straight quarters of growth. Government investment was revised to a 3.5 percent growth rate from 3.7 percent as defense, and state and local government spending estimates were pared.

Growth in home building was trimmed to a 14.2 percent rate from 14.4 percent. Residential construction is benefiting from the Federal Reserve's ultra accommodative monetary policy stance, which has driven mortgage rates to record lows.