The U.S. economy grew more slowly than first thought in the third quarter, but a fifth month of gains in house prices in September and an improvement in consumer morale signaled the anemic recovery was intact.

In its second estimate of third quarter gross domestic product published on Tuesday, the Commerce Department said the economy expanded at a 2.8 percent annual rate, rather than the 3.5 percent pace it estimated last month.

It was still the fastest pace since the third quarter of 2007, reflecting government fiscal stimulus, but slightly less than expectations for a growth rate of 2.9 percent.

That helped to push stocks on Wall Street lower as investors shrugged off two other reports showing that house prices maintained their gains in September and consumers were a bit more optimistic this month, despite high unemployment.

We are still on the right path and a double-dip (recession) is not on the cards, said Jonathan Basile, an economist at Credit Suisse in New York.

With federal programs the main force behind the recovery, some economists are wary of risks of a double-dip recession -- a scenario where output perks up briefly only to fall again when government support ends.

Economists expect the U.S. unemployment rate to climb from its current 26-1/2 year high of 10.2 percent. President Barack Obama is under to pressure to find ways to spur job growth without unduly fueling an already record budget deficit.

The return to growth in the July-September period, after four straight quarters of declining output, probably ended the most painful U.S. recession in 70 years. The economy contracted at a 0.7 percent rate in the April-June period.

Output was constrained by consumer spending that was not as robust as first thought, as well as strong imports and weak investment in commercial buildings.

But corporate profits surged as businesses raised output even as they were cutting payrolls.


Imports into the United States were revised higher, showing more domestic demand was sated by overseas production. Imports jumped at 20.8 percent annual rate, the biggest gain since the second quarter of 1985, instead of 16.4 percent.

The rise in imports eclipsed a strong recovery in exports, thanks to a weak U.S. dollar, leaving a wider trade gap that took off just over half a percentage point from GDP.

Both (exports and imports) grew very strongly and indicated that global trade was returning to normal. Further small increases in the net trade deficit are expected and will be a drag on future GDP growth, said Brian Fabbri, chief North America economist at BNP Paribas in New York.

A drop in the construction of nonresidential structures also restrained growth in the last quarter. Commercial building activity dropped at a 15.1 percent pace rather than 9 percent, as previously reported, highlighting the problems in commercial real estate.

It shaved just over half a percentage point off GDP growth. Consumer spending, which normally accounts for more than two-thirds of U.S. economic activity, rose at a 2.9 percent rate, instead of the 3.4 percent pace reported last month.

It was the biggest rise since the first quarter of 2007 and represented a turnaround from a 0.9 percent second quarter fall. Businesses also reduced inventories at a slightly faster rate than had been anticipated.

While that revision trimmed third quarter GDP growth, analysts said it helps lay the groundwork for future production.

That sets up for a better fourth-quarter GDP with more restocking, said John Canally, economist at LPL Financial in Boston.

Excluding inventories, GDP rose at a 1.9 percent rate instead of 2.5 percent. That marked a pickup from the 0.7 percent pace in the second quarter, but showed demand was somewhat lackluster.

After-tax corporate profits grew 13.4 percent in the third quarter, the largest gain since the first quarter of 2004 and more than double what markets had expected.

The strong profit growth reflected deep cost-cutting by companies, mostly headcount reduction, to deal with tepid demand.

Home building activity rose at a 19.5 percent rate in the third quarter, below previous estimates of 23.4 percent. It was the first time home building contributed to GDP since 2005.

In another sign of stability in a sector that was at the heart of the recession, the Standard & Poor's/Case-Shiller index of home prices in 20 metropolitan areas rose 0.3 percent in September. Analysts said a tax credit for first time homebuyers helped support the market.

Separately, the Conference Board's index of consumer attitudes increased slightly to 49.5 in November from 48.7 in October. That compared to market expectations of 53.1.

(Additional reporting by Lynn Adler and Tom Ryan in New York; editing by Andrew Hay)