By Lucia Mutikani
WASHINGTON (Reuters) - U.S. economic growth slowed less than expected in the third quarter as a further contraction in business investment was offset by resilient consumer spending, further allaying financial market fears of a recession.
The Federal Reserve cut interest rates for the third time this year on Wednesday amid lingering threats to the longest expansion on record from uncertainty over trade policy, slowing global growth and Britain's departure from the European Union.
The U.S. central bank, however, signaled a pause in its easing cycle, which started in July when it reduced borrowing costs for the first time since 2008.
"An orderly economic slowdown is in progress," said Sung Won Sohn, a business economics professor at Loyola Marymount University in Los Angeles. "Unfortunately, businesses do not share the same optimism consumers have."
The Trump administration's trade war with China has eroded business confidence, contributing to the second straight quarterly contraction in business investment. The fading stimulus from last year's $1.5 trillion (£1.16 trillion) tax cut package is also sapping momentum from the expansion, now in its 11th year.
There are concerns that the slump in business investment will eventually spill over to consumer spending and significantly restrain economic growth. But Fed Chair Jerome Powell said the central bank did not see that risk, citing a strong labor market.
"We really don't see it," Powell told reporters. "The consumer-facing companies that we talk to in our vast network of contacts report that consumers are doing well and are focused on the good jobs market and rising incomes."
Gross domestic product increased at a 1.9% annualized rate in the third quarter, also as businesses maintained a steady pace of inventory accumulation, exports rose and the housing market rebounded after contracting for six straight quarters, the government said in its advance estimate of GDP.
The economy grew at a 2.0% pace in the April-June period. Economists polled by Reuters had forecast GDP increasing at a 1.6% rate in the July-September quarter. Third-quarter growth marked a further slowdown from the brisk 3.1% rate notched in the first three months of the year. Still, the economy is expanding at its potential, estimated between 1.7% and 2.0%.
The GDP report showed the overall trend in inflation remaining moderate last quarter.
The dollar fell against a basket of currencies, while U.S. Treasury prices rose. Stocks on Wall Street were trading higher.
RECESSION FEARS EBBING
Recession fears have subsided in recent months mainly on hopes of a resolution to the 15-month trade war. President Donald Trump this month announced a truce, delaying additional tariffs that were due in October. But a trade deal is far from certain. Sources close to the negotiations say Trump's demand that Beijing commit to big purchases of American farm products has become a major sticking point in talks.
Despite last quarter's better-than-expected performance, the economy is expected to again miss the White House's ambitious goal of 3.0% annual growth this year. It grew 2.9% last year.
"The economy is still laboring against the headwinds of trade war uncertainty," said Chris Rupkey, chief economist at MUFG in New York. "Even if growth miraculously soars 4.0% in the fourth quarter the economy won't grow faster than 2.8% in 2019."
Growth in consumer spending, which accounts for more than two-thirds of U.S. economic activity, slowed to a still-healthy 2.9% rate last quarter after surging at a 4.6% pace in the second quarter, the fastest since the fourth quarter of 2017.
Consumer spending is being powered by the lowest unemployment rate in nearly 50 years. But moderating job growth, ebbing consumer confidence and stalling wage gains are raising doubts about the consumer's resilience.
Income at the disposal of households rose at a 4.5% rate in the third quarter compared to a 4.8% pace in the prior period.
A separate report on Wednesday showed private payrolls increased by 125,000 jobs in October after rising 93,000 in September. Job gains have been slowing this year because of slowing demand and worker shortages.
"If hiring weakens any further, unemployment will begin to rise," said Mark Zandi, chief economist at Moody's Analytics.
Trade tensions are undercutting capital expenditure. Business investment dropped at a 3.0% rate in the third quarter, the sharpest contraction in more than 3-1/2 years, after falling at a 1.0% rate in the second quarter. It was pulled down by declines in spending on equipment and nonresidential structures such as mining exploration, shafts and wells.
Design problems at aerospace giant Boeing (N:BA) have also hurt business investment. The world's largest planemaker last week reported a 53% drop in quarterly profit because of the grounding in March of its best-selling 737 MAX jets following fatal crashes in Indonesia and Ethiopia.
While that undermined investment, the planes rolling from the production lines contributed to the $69.0 billion pace of increase in inventories last quarter. Inventories rose at a $69.4 billion rate in the April-June period. They trimmed GDP growth by only 0.05 percentage point in the third quarter compared to 0.91 percentage point in the second quarter.
"It appears as though aircraft, including the 737 MAX, accounted for at most one-fourth of the increase in private inventories in third quarter," said Michael Feroli, an economist at JPMorgan (NYSE:JPM) in New York.
The rebound in exports blunted a surge in imports, leading to a narrowing in the trade deficit. Trade subtracted a negligible 0.08 percentage point from GDP growth in the third quarter after cutting 0.68 percentage point in the prior period.
Government spending cooled after rising at its fastest pace in 10 years in the second quarter. Spending on homebuilding increased at a 5.1% rate, rising for the first time since the fourth quarter of 2017, thanks to lower interest rates.