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WRAPUP 2-U.S. economy shows strength in third quarter

(Adds details on consumer confidence)

By Tim Ahmann

WASHINGTON, Nov 26 (Reuters) - The U.S. economy grew more briskly in the third quarter than first thought, with robust car sales helping to more than triple the weak second-quarter pace, the government said on Tuesday.

However, two other reports showed new home sales dropped in October while consumer sentiment posted a small-than-expected rise this month. Investors, concerned over a loss of economic momentum, sent prices for stocks down and U.S. Treasuries up.

U.S. gross domestic product, a measure of all output within the country's borders, rose at a revised 4.0 percent annual rate in the July-September period after an anemic 1.3 percent gain in the preceding quarter, the Commerce Department said.

Commerce had originally estimated the economy expanded at a slower 3.1 percent pace last quarter.

However, a build-up in business inventories was one of the main drivers of the upward GDP revision and there was a fall in corporate spending, which was originally reported as rising a bit. Economists said these were an ill omen for growth ahead.

While growth in the third quarter was strong, several signs -- including weakness in manufacturing and a slide in auto sales -- have suggested the economy began to brake sharply as the quarter drew to a close.

A survey of professional forecasters released on Tuesday by the National Association for Business Economics found an expectation the economy would expand at a pace of just 1.4 percent in the final three months of the year.

While an inventory build was a big factor in the upward GDP revision, the department also boosted estimates for government spending and housing. And final demand -- a measure of the economy's strength when swings in inventories are excluded -- posted a solid 3.5 percent rise.

"A pretty strong number," said Todd Finkelstein, director of fixed income at Boston Advisors. "Even without inventory building, the economy showed some clear strength."

A step-up in consumer spending, up at a 4.1 percent clip after an 1.8 percent gain in the second quarter, accounted for most of the quarter-to-quarter improvement in the economy's performance. A sharp gain in auto sales, helped by zero-percent financing deals and other incentives, played a big role.

CONFIDENCE RISES

Separately, the private Conference Board reported that its consumer confidence index rebounded in November from a nine-year low, but the rise to 84.1 from 79.6 in October was smaller than economists had expected and the index remained well below September's reading of 93.7.

Most of the index's gain came from optimism on the economy's six-month outlook.

"The rebound in expectations suggests consumers do not expect economic conditions to become worse," said Lynn Franco, director of the board's Consumer Research Center. She said the report signaled "brighter holiday spending than was anticipated only a month ago."

But the report was not without dark spots. Over 27 percent of those surveyed said jobs were hard to get -- the largest proportion in more than eight years. A rise in this index tends to foreshadow moves up in the jobless rate, now 5.6 percent.

Consumers, aided by lower interest rates, have have been the stalwarts keeping the recovery on track.

The Commerce Department said sales of new single-family homes in October slipped from September's record pace, dropping 4.5 percent to a 1.007 million unit annual rate. Despite the slide, it was still the third best monthly sales rate on record as historically low mortgage rates continued to pull buyers into the market.

BUSINESS SPENDING FALLS

The GDP report showed a 0.7 percent drop in business spending on facilities and equipment -- the eighth consecutive quarterly decline -- as the revisions erased a previously reported gain. However, within that category, spending on equipment and software staged a second straight advance.

A collapse in business spending led the economy into recession last year, and analysts say a solid rise in corporate outlays is needed to ensure a healthy, sustainable recovery.

The department also said after-tax corporate profits posted their third consecutive quarterly gain, rising 2.1 percent after a 1.7 percent increase in the prior three-month period.

Inflation continued tame, with the closely watched price index for consumer spending up at a subdued 1.7 percent pace.

Businesses boosted inventories by $15.5 billion in the third quarter after a rise of just $4.9 billion in the second quarter. That increase accounted for nearly a half-percentage point of the 4.0 percent rise in GDP.

Kevin Logan, senior economist at Dresdner Kleinwort Wasserstein, said businesses were caught by surprise as demand slowed in August and September, leading to an unwanted buildup in inventories.

"We entered the fourth quarter with demand slowing down, and no doubt businesses will make an effort to reduce the accumulation of inventories," Logan said. "We think GDP in the fourth quarter will be between zero and 1 percent."

Concerned by signals the economy was flagging, the Federal Reserve earlier this month lowered the benchmark federal funds rate by a half-percentage point to a fresh four-decade low of 1.25 percent, saying the move should help the economy through its "current soft spot."