The U.S. economy grew faster than initially thought in the third quarter as restocking by businesses provided a big boost, but consumer and business spending were revised lower in a sobering reminder of the recovery's underlying weakness.
Gross domestic product xpanded at a 2.7 percent annual rate, the Commerce Department said on Thursday, as export growth also helped to offset the weakest consumer spending and first drop in business investment in more than a year.
While the growth pace was much quicker than the 2 percent rate the government estimated last month and the best since the fourth quarter of 2011, it was hardly a sign of strength as the lift from inventories will likely be lost in the fourth quarter.
The economy is also bracing for deep cuts in government spending and tax increases early next year, known as the fiscal cliff, which could suck $600 billion from the economy and fuel a fresh recession. (Read More: 'Cliff' Talks Send Stocks on Roller Coaster Ride)
Economists polled by Reuters had expected GDP growth to be raised to a 2.8 percent pace.
"The bulk of the (GDP) rise is inventory adjustment," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington. "So I think the market may look past this number, thinking real GDP in the economy is a bit lower. It was also concerning to see consumer spending revised down."
A separate report from the Labor Department showed initial claims for state unemployment benefits dropped 23,000 to a seasonally adjusted 393,000, but still staying elevated after superstorm Sandy.
The storm, which ripped through the East Coast in late October, has distorted initial claims data in recent weeks, making it hard to get a clear pulse of the labor market, whose struggles have underscored the economy's weakness.
Inventories Add, Not Subtract
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.
A smaller trade deficit was also a factor behind the upward revision to GDP as export growth outpaced a 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.
Other 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 a 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. (Read More: Apple's iPad Owns Tablet Market...But Not For Long)
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.