WRAPUP 4-U.S. GDP growth tepid in Q3, more Fed easing seen
* Economy grows at 2.0 pct rate in third quarter
* Consumer spending accelerates, largest rise since 2006
* Business spending slows, residential construction falls (Adds reports on consumer sentiment, Midwest factory activity; updates markets)
By Lucia Mutikani
WASHINGTON, Oct 29 (Reuters) - U.S. economic growth edged up as expected in the third quarter but not enough to chip away at high unemployment or change perceptions of more monetary easing from the Federal Reserve next week.
Gross domestic product expanded at a 2.0 percent annual rate as consumer spending rose at its fastest pace since 2006, the Commerce Department said on Friday.
While consumer spending quickened and business investment continued to expand, much of the rise in demand was met by overseas production and domestic goods continued to pile up in warehouses, suggesting tepid growth in the fourth quarter.
"The economy is recovering, but recovering at an anemic pace, and this certainly will help the Fed in its deliberations on Tuesday," said Hugh Johnson, chief investment officer at Hugh Johnson Advisors in Albany, New York.
The U.S. economy braked abruptly in the second quarter, when growth slowed to a 1.7 percent rate, and third-quarter growth matched economists' expectations.
Graphic showing U.S GDP:
Details of the report, which showed core inflation running at its second-lowest level since 1962, reinforced financial market expectations the Fed will announce a second round of bond purchases at its Nov. 2-3 meeting to push interest rates down further to energize the recovery and ward off deflationary pressures.
Analysts expect the Fed to announce a fresh round of bond purchases of about $100 billion a month when its meeting concludes on Wednesday.
U.S. stocks opened lower, while bond prices rose on the premise of more "quantitative easing" from the Fed. The dollar extended losses against the yen on the prospect the Fed will need to print more money.
The economy is experiencing a slow recovery by historical standards, with unemployment at 9.6 percent and Americans increasingly nervous about the future.
That is expected to shift the country's political landscape in Tuesday's congressional elections, seen as a vote on President Barack Obama's performance on the economy. His Democratic party is expected to suffer big losses.
CONSUMPTION SOLID, TRADE DRAGS
Economists say a growth pace of at least 3.5 percent, driven by solid domestic demand and exports, over several quarters is needed to bring down high unemployment.
A pick-up in consumer spending gave the economy a lift in the third quarter. Consumer spending, which accounts for 70 percent of U.S. economic activity, increased at a 2.6 percent rate after rising 2.2 percent in the prior period.
The third-quarter increase was the largest since the fourth quarter of 2006 and added 1.79 percentage points to GDP growth.
A separate report showed consumer sentiment weakened a touch in October, dropping to its lowest level in nearly a year and suggesting consumer spending could soften. [ID:nN29257708]
Output in the third quarter was also supported by a $115.5 billion increase in business inventories after a $68.8 billion rise in the second quarter. Inventories added 1.44 percentage points to growth.
Excluding inventories, the economy expanded at a 0.6 percent pace, slowing from 0.9 percent in the second quarter.
The build up in inventories suggests slower production ahead, although a report on manufacturing activity in the U.S. Midwest region showed production rising. [ID:nN29144772]
The GDP report showed business spending continued to grow in the July-September quarter, but the pace slowed from the prior period, with notable moderation in investment in equipment and software after three quarters of robust growth.
Spending on equipment and software slowed to a 12.0 percent rate in the third quarter after a vigorous 24.8 percent rate in the prior period. However, investment in structures grew for the first time since the second quarter of 2008.
Growth was also held back as imports continued to outpace exports. But the trade deficit narrowed somewhat during the quarter, subtracting 2.01 percentage points from GDP growth compared to 3.5 percentage points in the second quarter.
Residential construction was also a drag on growth in the third quarter, reflecting the end of a tax credit for home buyers. Government spending made a modest contribution to growth as investment by state and local governments dropped in the third quarter after rising in the prior period.
The GDP report showed the Fed's preferred inflation measure, the personal consumption expenditures price index, excluding food and energy, rose at an annual rate of 0.8 percent in the third quarter.
That was the smallest increase since the fourth quarter of 2008 and the second-lowest reading since the fourth quarter of 1962. Fed officials have signaled concern that low inflation could ultimately turn into a pernicious deflation if the recovery does not strengthen.
The U.S. central bank cut overnight interest rates to near zero in December 2008 and has already bought about $1.7 trillion worth of Treasury and mortgage-related debt. (Additional reporting by Caroline Valetkevitch in New York, Editing by Andrea Ricci)
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