By Lucia Mutikani
WASHINGTON (Reuters) - The U.S. economy grow at a much faster pace than initially thought in the third quarter, pointing to strengthening fundamentals that should help it weather slowing global demand.
The Commerce Department on Tuesday raised its estimate of gross domestic product to a 3.9 percent annual pace from the 3.5 percent rate reported last month, reflecting upward revisions to business and consumer spending, as well as restocking.
The performance marked the two strongest back-to-back quarters of growth since the second half of 2003 and underscored the economy's resilience against the backdrop of a recession in Japan and slowing growth in China and the euro zone.
"This report will go some way in providing further confirmation about the sustainability of the current economic recovery," said Millan Mulraine, deputy chief economist at TD Securities in New York.
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Economists had expected growth would be trimmed to a 3.3 percent pace. When measured from the income side, the economy grew at its fastest pace since the first quarter of 2012.
Other reports on Tuesday showed consumer confidence hit a five-month low in October, while the pace of house price appreciation moderated further in September.
U.S. stocks were trading slightly lower and the dollar slipped against a basket of currencies. Prices for U.S. Treasury debt rose marginally.
The third quarter marked the fourth out of the past five quarters that the economy has expanded above a 3.5 percent pace.
Data ranging from manufacturing to employment and retail sales suggest the economy retained some of that momentum early in the fourth quarter.
But given that inventories rose more than previously estimated in the third quarter, businesses might be reluctant to continue restocking at the same pace. As such, fourth-quarter growth is expected to come in below a 3 percent rate.
STRONG FUNDAMENTALS
Underscoring the economy's strong fundamentals, growth in domestic demand was raised to a 3.2 percent pace in the third quarter instead of the previously reported 2.7 percent pace.
"This is vindication for the Federal Reserve that they downplayed concerns overseas and it's appropriate to speak about rate hikes next year," said Christopher Low, chief economist at FTN Financial in New York.
The U.S. central bank is expected to start raising its short-term interest rate sometime in mid-2015. The Fed has kept its benchmark lending rate near zero since December 2008.
Consumer spending, which accounts for more than two-thirds of U.S. economic activity, was revised up to a 2.2 percent pace in the third quarter from the previously reported 1.8 percent rate.
Business spending on equipment was raised to a 10.7 percent rate from a 7.2 percent. While exports grew, the pace was less brisk than previously reported, leaving trade contributing only 0.78 percentage point to GDP growth instead of 1.32 percentage points.
There were downward revisions for growth in wages and salaries in the second and third quarters. Economists said the revisions brought the GDP-based wages and salaries measures in line with the nonfarm payroll-based figures.
"This should ease concerns that the Fed was falling behind the curve due to mismeasured wage inflation data," said Michael Feroli, an economist at JPMorgan in New York.
(Reporting by Lucia Mutikani; Additional reporting by Richard Leong in New York; Editing by Paul Simao)
