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WRAPUP 4-U.S. economy shows strength in third quarter

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By Tim Ahmann

WASHINGTON, Nov 26 (Reuters) - U.S. economic growth was brisker than first thought in the third quarter while consumer confidence broke a five-month downtrend in November, but within these apparently upbeat reports on Tuesday lurked signs the recovery was still not on solid ground.

Gross domestic product, a measure of all output within U.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.

The latest figure, up from an originally reported 3.1 percent, came in a bit stronger than economists had expected but did nothing to alter forecasts for sharply slower growth in the current quarter.

In fact, a rise in business inventories was one of the main drivers of the upward GDP revision and economists said the stockpiling was an ill omen for growth ahead as businesses try try to bring stocks into line with sales.

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

In addition, business spending on facilities and equipment -- originally reported as having climbed -- fell according to Commerce's latest revision.

Analysts say businesses must boost capital spending if the economy is going to enjoy a solid, sustained recovery.

Separately, the Conference Board said its consumer confidence index rebounded in November from a nine-year low.

However, 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.

In addition, 27.5 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 presage jobless rate increases.

Investors looked on the reports as signs of weakness. The Dow Jones industrial average closed off 173 points at 8,676, while the tech-laden Nasdaq composite fell 38 points to finish at 1,444. Prices for U.S. Treasury bonds rose.

THROTTLING BACK

While growth in the third quarter was strong, several indications -- 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 economists expect the economy to expand at a pace of just 1.4 percent in the final three months of the year.

Concerned by signals the recovery from last year's recession was flagging, the Federal Reserve earlier this month cut 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."

While inventories were a big factor in the upward GDP revision, the department also boosted estimates for government spending and housing. 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."

Consumer spending rose at a 4.1 percent clip after an 1.8 percent gain in the second quarter, accounting 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.

Separate reports showed that consumers may be growing cautious as the crucial holiday shopping season approaches.

A weekly report on the nation's chain stores, published by Bank of Tokyo-Mitsubishi and UBS Warburg, showed a modest 0.9 percent gain in the week ended Nov. 23 on the heels of a 1.2 percent drop a week earlier.

Instinet's Redbook report, another retail sector snapshot, showed sales edged down 0.2 percent in the first three weeks of November compared with the same period in October.

BUSINESS SPENDING SLUMP

Commerce said in the GDP report that business spending on facilities and equipment fell 0.7 percent -- the eighth quarterly drop in a row. However, spending on equipment and software staged a second straight advance.

Inventories increased by $15.5 billion in the third quarter after a rise of just $4.9 billion in the second quarter. The climb, the largest in over two years, accounted for nearly a half-percentage point of the 4.0 percent rise in GDP.

Economists have been biting their nails, uncertain whether the medicine of low interest rates will keep home sales and consumer spending propped up long enough for businesses to step back into the picture.

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. Still, it was the third best monthly sales rate on record as historically low mortgage rates continued to pull buyers into the market.