* Third-quarter growth at 2 percent annual rate
* Consumer spending accounts for bulk of gain
* Housing supportive; business spending and trade drags
* Growth pace still too sluggish to lower unemployment
WASHINGTON, Oct 26 (Reuters) - U.S. economic growth picked up in the third quarter as a late burst in consumer spending offset the first cutbacks in investment in more than a year by cautious businesses.
Gross domestic product expanded at a 2 percent annual rate, the Commerce Department said on Friday, accelerating from the second quarter's 1.3 percent pace.
Still, the stronger pace of expansion fell short of what is needed to make much of a dent in unemployment, and details of the report did not bode well for an acceleration in output in the fourth quarter, as a spurt in government spending was seen as temporary.
A growth pace in excess of 2.5 percent is needed over several quarters to make substantial headway cutting the jobless rate. Economists polled by Reuters had expected a 1.9 percent growth pace in the third quarter.
The report offers little cheer for the White House ahead of the closely contested Nov. 6 presidential election, in which President Barack Obama is trying to fend off Republican challenger Mitt Romney.
U.S. stock index futures pared losses after the data, while Treasuries briefly cut early price gains. The dollar trimmed losses against the yen, and cut gains against the euro.
Since climbing out of the 2007-09 recession, the economy has faced a series of headwinds from high gasoline prices to the debt turmoil in Europe and, lately, fears of U.S. government austerity.
It has struggled to exceed a 2 percent growth pace and remains about 4.5 million jobs short of where it stood when the downturn started.
Consumers, however, largely shrugged off the impending sharp cuts in government spending and higher taxes, which are due at the start of the year absent congressional action.
Indeed, they went on a bit of a shopping spree as the quarter wound down, buying a range of goods - including automobiles and Apple Inc's iPhone 5.
Consumer spending, which accounts for about 70 percent of U.S. economic activity, grew at a 2 percent rate after increasing 1.5 percent in the prior period.
SPENDING DESPITE INCOME SQUEEZE
High stock prices and firming house values have made households a bit more willing to take on new debt, supporting consumer spending.
The faster pace of spending was achieved despite a spike in inflation pressures as gasoline prices rose. A price index for personal spending rose at a 1.8 percent rate, accelerating from the second quarter's 0.7 percent pace.
But a core inflation measure that strips out food and energy costs slowed to a 1.3 percent rate after rising 1.7 percent in the prior quarter, suggesting the increase in overall price pressures will be temporary.
However, with about 23 million Americans either out of work or underemployed, the current pace of spending may not be sustained, especially if gasoline prices maintain their recent upward march and families get a higher tax bill in 2013.
Incomes were squeezed in the last quarter, causing households to save less to fund their purchases.
The amount of income available to households after accounting for inflation and taxes rose at a tepid 0.8 percent rate in the third quarter, slowing after a brisk 3.1 percent pace the prior period.
The saving rate slowed to 3.7 percent after increasing to 4 percent in the second quarter.
There was surprisingly good news on government spending, which snapped eight straight quarters of declines on a strong rebound in defense outlays. Government spending accounted for 0.7 percentage point of GDP growth. However, that might not be sustained given the austerity plans for next year.
Fears of the fiscal cliff fears hammered business spending, which dropped at a 1.3 percent pace in the third quarter, falling for the first time since the first three months of 2011.
The fiscal cliff refers to automatic tax hikes and government spending cuts, which will drain about $600 billion out of the economy next year absent congressional action.
Part of the drag in business investment, which had been a source of strength for the economy, came from equipment and software, where outlays were the weakest since the second quarter of 2009.
Spending on nonresidential structures contracted after five straight quarters of growth.
In contrast, home building surged at a 14.4 percent rate, thanks in large part to the Federal Reserve's ultra accommodative monetary policy stance, which has driven mortgage rates to record lows.
Inventories were a drag on growth because of a drought in the country's Midwest, which has decimated crops. Farm inventories cut 0.42 percentage point from GDP growth. Excluding inventories, the economy grew at a 2.1 percent pace.
Final sales to domestic purchasers, a measure of domestic demand, rose at a 2.3 percent pace, the fastest since the fourth quarter f 2010.
Slowing global demand, particularly weakness in Europe and China, caused U.S. exports to contract for the first time since the first quarter of 2009. That left a trade deficit that weighed on GDP growth.