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U.S. third-quarter economic growth is revised sharply upward to 3.6%

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WASHINGTON -- The economy grew at a surprisingly robust 3.6% annual rate from July through September, much faster than initially reported, the Commerce Department said Thursday.

But much of the improvement was driven by a large buildup in inventories by businesses that is unlikely to continue.

The growth in total economic output, or gross domestic product, in the third quarter of the year was the best since the first quarter of 2012. It was much higher than the 2.8% annual rate originally reported by the Commerce Department last month.

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Economists had expected the figure to be revised upward, but the new estimate exceeded their projections of 3.1% growth. The economy grew at a 2.5% annual rate in the second quarter.

But the news was not as good as the numbers might indicate.

About half of the third quarter growth came from a surge in inventory investment by  companies. Businesses increased their inventories by $116.5 billion, more than in the previous two quarters combined.

The Commerce Department had originally estimated that inventories grew by $86 billion in the third quarter.

The huge inventory expansion can't continue as warehouses, auto dealer lots and store shelves eventually get full, economists said.

Gus Faucher, senior economist at PNC Financial Services, predicted "businesses likely will cut back on investment in inventories in late 2013 and early 2014, weighing on near-term growth."

The larger inventories need more consumer spending before they can be replenished again. And consumer spending increased at a weak 1.4% pace in the third quarter, the worst performance since the fourth quarter of 2009.

Personal consumption expenditures had increased at a 1.8% in the second quarter of the year.

The new data came amid a slew of public and private reports indicating the economic recovery is picking up steam as the year ends.

While Thursday's report is dated, covering the summer months, it shows the economy was much stronger heading into October's partial government shutdown than initially thought.

The 16-day shutdown is expected to reduce the pace of economic growth significantly in the fourth quarter to less than a 2% annual rate. Economists forecast growth will pick up again at the start of next year.

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