WRAPUP 1-U.S. third-quarter economic growth trimmed; jobless claims rise

* Third-quarter gross domestic product rises 3.2 percent

Business spending on equipment revised higher

* Consumer spending growth lowered slightly

* Weekly jobless claims increase 20,000

By Lucia Mutikani

WASHINGTON, Dec 21 (Reuters) - The U.S. economy grew at its fastest pace in more than two years in the third quarter, powered by robust business spending, and is poised for what could be a modest lift next year from sweeping tax cuts passed by Congress this week.

Other data on Thursday showed a jump in the number of Americans filing for unemployment benefits last week. The underlying trend in jobless claims, however, remained consistent with a tightening labor market.

Gross domestic product expanded at a 3.2 percent annualized rate last quarter, the Commerce Department said in its third GDP estimate for the period. While that was slightly down from the 3.3 percent reported last month, it was the quickest pace since the first quarter of 2015 and was a pickup from the second quarter's 3.1 percent growth rate.

It also marked the first time since 2014 that the economy experienced growth of 3 percent or more for two straight quarters. But the expansion in the July-September period likely overstated the health of the economy.

An alternate measure of growth, gross domestic income, rose at a 2.0 percent rate in the third quarter. GDI was previously reported to have increased at a 2.5 percent rate.

The average of GDP and GDI, also referred to as gross domestic output and considered a better measure of economic growth, increased at a 2.6 percent rate instead of the previously reported 2.9 percent.

Republicans in the U.S. Congress this week approved a broad package of tax cuts in what was the largest overhaul of the tax code in 30 years, handing President Donald Trump a major legislative victory. Trump is expected to soon sign the legislation, which has $1.5 trillion in tax cuts.

Economists are forecasting a modest economic boost from the overhaul, which includes slashing the corporate income tax rate to 21 percent from 35 percent. The fiscal stimulus will come while the economy is at full employment, which raises the risk of it overheating.

"Longer run, the tax cuts will add little to the economy but will add significantly to the government's deficits and debt load," said Mark Zandi, chief economist at Moody's Analytics in West Chester, Pennsylvania.

Prices of U.S. Treasuries mostly held steady at higher levels after the data, while the dollar pared gains against the yen and euro. U.S. stock index futures were trading slightly higher.


Growth in the third quarter was also boosted by an accumulation of unsold goods and a rebound in government investment. Growth in business investment in equipment was raised to a 10.8 percent pace, the fastest in three years, from the previously reported 10.4 percent.

Growth in consumer spending, which accounts for more than two-thirds of the U.S. economy, was revised down by one-tenth of a percentage point to a 2.2 percent rate in the third quarter. Consumer spending increased at a robust 3.3 percent rate in the second quarter.

The government said after-tax corporate profits surged at a 5.7 percent rate last quarter instead of the previously reported 5.8 percent. Profits rose at only a 0.1 percent pace in the second quarter. Undistributed profits jumped at a 13.9 percent rate after declining for two straight quarters, suggesting that companies were anticipating deep tax cuts.

In a separate report, the Labor Department said initial claims for state unemployment benefits rose 20,000 to a seasonally adjusted 245,000 for the week ended Dec. 16.

Last week marked the 146th straight week that claims remained below the 300,000 threshold, which is associated with a strong labor market. That is the longest such stretch since 1970, when the labor market was smaller.

The labor market is near full employment, with the jobless rate at a 17-year low of 4.1 percent. Labor market tightness and a strengthening economy encouraged the Federal Reserve to increase interest rates last week for a third time this year. The U.S. central bank has forecast three rate hikes for 2018.

Last week, the four-week moving average of initial claims, considered a better measure of labor market trends as it irons out week-to-week volatility, rose only 1,250 to 236,000.

The claims data covered the survey period for December's nonfarm payrolls. The four-week average of claims fell 4,000 between the November and December survey weeks, suggesting another month of strong job growth.

The economy added 228,000 jobs in November. It needs to create 75,000 to 100,000 jobs per month to keep up with growth in the working-age population. (Reporting by Lucia Mutikani; Editing by Paul Simao)