By Lucia Mutikani
WASHINGTON (Reuters) - The U.S. economy slowed in the third quarter as previously reported, but the pace was likely strong enough to keep growth on track to hit the Trump administration's 3 percent target this year.
Gross domestic product increased at a 3.5 percent annualized rate, the Commerce Department said on Wednesday in its second estimate of third-quarter GDP growth. That was unchanged from its estimate in October and well above the economy's growth potential, which economists estimate to be about 2 percent.
The economy grew at a 4.2 percent pace in the second quarter. While businesses accumulated inventory at a faster pace and spent more on equipment than initially thought in the third quarter, that was offset by downward revisions to consumer spending and exports.
Economists polled by Reuters had forecast third-quarter GDP growth unrevised at 3.5 percent.
Growth is being driven by the White House's $1.5 trillion tax cut package, which has given consumer spending a jolt and bolstered business investment. The fiscal stimulus is part of measures adopted by President Donald Trump's administration to boost annual growth to 3 percent on a sustainable basis.
The government also reported on Wednesday that after-tax corporate profits increased at a 3.3 percent rate last quarter after rising at a 2.1 percent pace in the second quarter.
An alternative measure of economic growth, gross domestic income (GDI), increased at a rate of 4.0 percent in the third quarter, quickening from the second quarter's 0.9 percent pace.
The average of GDP and GDI, also referred to as gross domestic output and considered a better measure of economic activity, increased at a 3.8 percent rate in the July-September period, up from a 2.5 percent growth pace in the second quarter.
But dark clouds are gathering over the economic expansion that is now in its ninth year and the second longest on record. Business spending on equipment appears to have weakened early in the fourth quarter and higher interest rates are slowing demand for housing.
With oil prices rapidly falling, business spending on equipment is likely to moderate significantly. Lower oil prices tend to hurt investment in the energy sector because of reduced profits. Brent crude oil prices have slumped by more than 30 percent from a four-year high above $86 in early October, pressured by concerns of oversupply amid slowing global economic growth.
General Motors Co announced on Monday that it would cut thousands from its North American workforce, slash production and eliminate some slow-selling car models, which could have ripple effects on the domestic economy.
Solid third-quarter growth is expected to keep the Federal Reserve on course to raise interest rates in December for the fourth time this year, despite an escalation of criticism from Trump that tighter monetary policy is starting to slow down the economy.
CONSUMER SPENDING REVISED LOWER
Growth estimates for the fourth-quarter are currently around a 2.5 percent pace. Economists expect GDP growth to slow further in 2019 as the fiscal stimulus fades and the effects of a bitter trade war with China as well as trade disputes with other trade partners take their toll.
The third-quarter growth slowdown mostly reflected the impact of Beijing's retaliatory tariffs on U.S. exports, including soybeans. Farmers front-loaded shipments to China before the tariffs took effect in early July, boosting second-quarter growth. Since then, soybean exports have declined every month, increasing the trade deficit.
Growth in consumer spending, which accounts for more than two-thirds of U.S. economic activity, increased at a 3.6 percent rate in the third quarter. That was down from the 4.0 percent rate estimated in October.
Imports increased a little bit faster in the third quarter than previously estimated while the drop in exports was much sharper, leading to an even wider trade gap, which sliced off 1.91 percentage points from GDP growth in the third quarter, instead of the 1.78 percentage points reported last month. That was the most since the second quarter of 1985.
The rebound in imports was partially driven by strong domestic demand and also reflected a rush by businesses to stockpile before U.S. import duties, mostly on Chinese goods, came into effect late in the third quarter.
Imports subtract from GDP growth. But some of the imports likely ended up in warehouses, adding to the stockpile of inventory, which contributed to GDP. Inventories increased at an $86.6 billion rate, instead of the $76.3 billion rate estimated in October.
As a result, inventory investment added 2.27 percentage points to GDP growth. That was more than the 2.07 percentage points reported last month and was the biggest contribution since the fourth quarter of 2011.
Business spending on equipment increased at a 3.5 percent rate, instead of the previously reported 0.4 percent rate. That was still the slowest pace in two years. The moderation in business spending has been blamed on the import tariffs, which are increasing manufacturing costs for companies, such as Caterpillar Inc, 3M Co and Ford Motor Co.
Some companies including Apple used their tax windfall to buy back shares on a massive scale.
(Reporting by Lucia Mutikani; Editing by Andrea Ricci)
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