Exports, government spending buoy growth

The U.S. economy grew faster than previously estimated in the third quarter as exports and government spending provided a lift, but that boost is likely to be lost amid slowing global demand and a move towards tighter fiscal policy in Washington.

Other data on Thursday showed factory activity in the mid-Atlantic region picked up this month, while home resales in November were the best in three years.

However, a rise in first-time applications for unemployment aid last week suggested job growth remained modest.

Gross domestic product expanded at a 3.1 percent annual rate, the Commerce Department said, a step-up from the 2.7 percent pace it reported last month.

It was the fastest growth since late 2011 and beat economists expectations for a 2.8 percent pace. In addition to upward revisions to exports and government spending, consumer spending was also a bit stronger than earlier thought.

"We still expect growth to decelerate in the fourth quarter. Beyond that, all will depend on the resolution of the fiscal cliff negotiations," said Nigel Gault, chief U.S. economist at IHS Global Insight in Lexington, Massachusetts.

The "fiscal cliff" refers to automatic government spending cuts and higher taxes that could suck about $600 billion from the economy early next year unless the U.S. Congress and the Obama administration can agree on a less drastic plan to cut the budget deficits

In second report, the Philadelphia Federal Reserve Bank said its business activity index rose to 8.1 from minus 10.7 in November, boosted by a rebound in new orders and shipments. That is a hopeful sign for the manufacturing sector, which has slowed in recent months.

Separately, the National Association of Realtors said existing home sales surged 5.9 percent in November to a seasonally adjusted annual rate of 5.04 million units.

It was the highest since November 2009 and confirmed the housing market recovery was strengthening.

"We are seeing ongoing momentum in the housing market. The sky is not falling on manufacturing. There were concerns earlier this summer. The contribution from housing-related manufacturing is making a difference," said Robert Dye, chief economist at Comerica in Dallas.

Still, the housing market recovery lacks the depth to replace manufacturing as the economy's growth engine.

MODEST JOB GROWTH

In a fourth report, the Labor Department said initial claims for jobless benefits increased 17,000 to a seasonally adjusted 361,000, in the low end of the range they held before Superstorm Sandy struck in late October.

The data covered the survey period for the government's report on December nonfarm payrolls and suggested modest job gains.

"The pace of hiring is still disappointing," said Tanweer Akram, a senior economist at ING Investment Management in Atlanta, adding that the pace of GDP growth in the current quarter "remains quite soft."

Akram said businesses appeared to be holding back out of concern the fiscal cliff could hit the economy hard.

Even if lawmakers and the White House agree on a plan to avoid the brunt of the blow, a tighter fiscal policy and a cooling global economy will likely still weigh on U.S. growth in coming quarters.

A Reuters poll of economists earlier this month showed a median forecast for GDP growth in the current quarter of just a 1.2 percent annual pace. Economists expect GDP to expand just 1.9 percent next year.

Job gains so far this year have averaged 151,000 per month, a pattern that is likely to hold through December.

Growth in the third quarter was revised higher to show a much faster pace of export growth and the first decline in imports in more than three years.

Exports grew at a 1.9 percent rate, rather than 1.1 percent, helping to narrow the trade deficit. Trade contributed 0.38 percentage point to GDP growth. The drop in imports is a sign of weak domestic demand.

Government spending was revised to a 3.9 percent growth rate from 3.5 percent, boosted by a rebound in state and local government outlays. It added three quarters of a percentage point to GDP growth in the third quarter.

While growth in consumer spending, which accounts for about 70 percent of U.S. economic activity, was raised by 0.2 percentage point to a 1.6 percent rate, that was mostly due to increased spending on healthcare.

Business inventories were trimmed to $60.3 billion from $61.3 billion. Restocking by businesses contributed 0.73 percentage point to GDP growth.

Given the still sluggish spending pace, some of the inventory accumulation might have been unplanned, suggesting businesses will need to liquidate stocks this quarter because of weak demand.

Excluding inventories, GDP rose at a revised 2.4 percent rate. Final sales of goods and services produced in the United States had been previously estimated to have increased at a 1.9 percent pace.

(Additional reporting by Jason Lange in Washington and Ellen Freilich in New York; Editing by Andrea Ricci)