WASHINGTON — The U.S. economy grew at a 2.7 percent annual rate from July through September, much faster than first thought. However, the strength is expected to fade in the final months of the year because of the impact of Hurricane Sandy and uncertainty about looming tax increases and government spending cuts.
The Commerce Department said Thursday that gross domestic product growth in the third quarter was significantly better than the 2 percent rate estimated a month ago and more than twice the 1.3 percent rate reported for the April-June quarter.
The main reason for the upward revision to the GDP was that businesses restocked at a faster pace than previously estimated. That offset weaker consumer spending growth.
GDP measures the nation's total output of goods and services — from restaurant meals and haircuts to airplanes, appliances and highways.
Most economists say economic growth is slowing to below 2 percent in the current October-December quarter. That's generally considered too weak to rapidly lower the unemployment rate.
Paul Ashworth, chief U.S. economist at Capital Economics, said companies are likely restocking more slowly now. Businesses typically cut back on restocking when they think consumers will spend less.
Economists cite two reasons for the anticipated weakness in consumer and business spending:
• Hurricane Sandy halted business activity along the East Coast in late October and November.
• Spending may weaken in the final weeks of the year, if lawmakers and Obama fail to reach a deal to avoid the "fiscal cliff." That's the name for sharp tax increases and spending cuts that would occur in January without a deal.
Companies are "likely thinning inventories just in case Congress fails to do its job, which is always a possibility," said Joel Naroff, chief economist at Naroff Economic Advisors.
Consumers and businesses appeared to be more cautious over the summer, according to the GDP report.
Consumer spending grew at a weaker 1.4 percent rate in the third quarter, down from the 2 percent rate estimated a month ago and nearly in line with the 1.5 percent rate in the second quarter.
Businesses spending on equipment and software fell at an annual rate of 2.7 percent in the third quarter, the first decline since the depths of the recession in April-June 2009.
The report showed continued strength in home building, which rose at an annual rate of 14.2 percent. And government spending expanded at an annual rate 3.5 percent, marking its first positive contribution to overall economic growth in two years. The increase was driven by a big jump in defense spending.