U.S. growth picks up as restocking offsets weak spending WASHINGTON (Reuters) - U.S. economic growth accelerated in the third quarter as businesses restocked shelves, but the slowest expansion in consumer spending in two years suggested an underlying loss of momentum. Gross domestic product grew at a 2.8 percent annual rate, the quickest pace in a year, after expanding at a 2.5 percent clip in the second quarter, the Commerce Department said on Thursday. Inventories, however, accounted for a hefty 0.8 percentage point of the advance made in the third quarter. A gauge of domestic demand rose at just a 1.7 percent rate, which economists said was insufficient to encourage the Federal Reserve to trim its bond purchases. The Fed has been buying $85 billion in bonds each month to keep borrowing costs low. "We haven't seen an acceleration in growth yet that the Fed is looking for to begin tapering," said Joshua Dennerlein, an economist at Bank of America Merrill Lynch in New York. Economists had expected third-quarter growth to come in at a 2 percent pace. Consumer spending, which accounts for more than two-thirds of U.S. economic activity, expanded at a 1.5 percent rate, the slowest pace since the second quarter of 2011. The slowdown in consumer spending suggests some of the inventory accumulation by businesses was probably unnecessary. That could force businesses to cut back on inventories, which would weigh on what is already expected to be weak growth in the fourth quarter because of the 16-day government shutdown in October. "Should demand accelerate heading into year end, businesses should be better-positioned to meet that demand," said Jim Baird, chief investment officer at Plante Moran Financial Advisors in Kalamazoo, Michigan. However, in the absence of a surge, future production may need to be trimmed to bring inventories back in line. Economists at Goldman Sachs lowered their fourth-quarter GDP estimate on the faster pace of inventory accumulation in the third quarter. They now expect a growth rate of 1.5 percent, rather than the previously estimated 2 percent pace. The weak consumer spending figure and a surprise interest rate cut by the European Central Bank on Thursday lifted U.S. Treasury debt prices. The dollar raced to a more than seven-week high against the euro, but stocks on Wall Street fell. Some of the slowdown in consumption in the third quarter reflected weak demand for utilities because of unseasonably cool weather. But households have also been wary of loosening their purse strings given a slowdown in employment growth. Though growth in household disposable income slowed to a 2.5 percent rate in the third quarter, the saving rate picked up to 4.7 percent, underscoring the caution among consumers. A separate report from the Labor Department suggested the jobs market continues to gradually improve. Initial claims for state unemployment benefits fell 9,000 to a seasonally adjusted 336,000 last week. Economists, however, now estimate the partial shutdown of the federal government last month will shave as much as 0.6 percentage point from GDP. Fiscal policy is clouding an already uncertain economic outlook and making businesses cautious about ramping up hiring. The GDP report showed they are also holding back on spending on capital goods. Overall business investment moderated in the third quarter, as spending on equipment fell for the first time in a year. Spending on nonresidential structures, including mining and drilling, rose for a second consecutive quarter. "The private sector decelerated over the summer, providing less of a cushion than we would like for the government shutdown in October," said Diane Swonk, chief economist at Mesirow Financial in Chicago. Apart from inventories, the economy got some support from a slowdown in import growth, which limited the rise in the trade deficit but also underscored the weakness of domestic demand. Trade added 0.31 percentage point to growth. Sturdy growth in spending by state and local authorities pushed government spending up for the first time in a year, but federal spending continued to drop. The housing market appeared to weather a spike in mortgage rates, with spending on residential construction increasing strongly. Reporting by Lucia Mutikani; Editing by Krista Hughes and Andrea Ricci