By Lucia Mutikani

WASHINGTON (Reuters) - The U.S. economy likely grew in the third quarter at its fastest pace of any quarter in nearly two years, again defying dire warnings of a recession, as higher wages from a tight labor market helped to power consumer spending.

The Commerce Department's advance estimate of third-quarter gross domestic product on Thursday is also expected to show residential investment rebounding after nine straight quarters of declines. Business investment is believed to have slowed as the boost fades from the construction of factories. President Joe Biden's administration has taken steps to encourage more semiconductor manufacturing in the U.S.

While the anticipated robust growth pace notched last quarter is probably not sustainable, it would demonstrate the economy's resilience despite aggressive interest rate hikes from the Federal Reserve. Still, growth could slow in the fourth quarter because of the United Auto Workers strikes and the resumption student loan repayments by millions of Americans.

Most economists have revised their forecasts and now believe the Fed can engineer a "soft-landing" for the economy, citing expectations that the July-September period will show a continuation of second-quarter strength in worker productivity and moderation in unit labor costs.

"We're seeing the exact opposite (of a recession)," said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto. "The American consumer, the biggest engine of the U.S. economy seems to have had a mid-year resurgence, largely because confidence improved through the summer because of the rally in the stock market and steadier gasoline prices."

According to a Reuters survey of economists, GDP likely increased at a 4.3% annualized rate last quarter, which would be the fastest since the fourth quarter of 2021. The economy grew at a 2.1% pace in the April-June quarter and is expanding at a pace well above what Fed officials regard as the non-inflationary growth rate of around 1.8%.

Estimates ranged from as low as a 2.5% rate to as high as a 6.0% pace, a wide margin reflecting that some of the input data, including September durable goods orders, goods trade deficit, wholesale and retail inventory numbers will be published at the same time as the GDP report.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, was likely the main driver, with Americans buying long-lasting goods like motor vehicles as well as going to concerts. Spending on goods appears to have picked up considerably because prices have come down.

A strong labor market has supported consumer spending. Though wage growth has slowed, it is rising a bit faster than inflation, lifting households' purchasing power. Growth in consumer spending is expected to have exceed a 4.0% rate after only rising at a 0.8% pace in the second quarter.

SPEED BUMP AHEAD

Student loan repayments resumed in October, which economists estimated was equal to roughly $70 billion, or around 0.3% of disposable personal income, and could dent spending. Though excess savings accumulated during the pandemic remain ample, they are largely concentrated among high-income households.

Low-income consumers are increasingly relying on debt to fund purchases, with higher borrowing costs boosting credit card delinquencies.

As a result, some economists see a sharp slowdown around the corner. Others are not too concerned, noting the labor market continues to churn out jobs at a solid clip.

"We see scary headlines about credit card debt rising too fast, but it had fallen quite a bit during the pandemic," said Luke Tilley, chief economist at Wilmington Trust in Philadelphia. "When you look at it as a share of people's monthly flow of income, it's actually fairly normal. I don't think that we've hit a point where it's a canary in the coal mine."

Labor market resilience should be evident in a separate report from the Labor Department on Thursday, which is expected to show a modest rise last week in the number of people filing new claims for unemployment benefits from the previous week's nine-month low.

The GDP data probably will not affect near-term monetary policy as financial conditions have already tightened with U.S. Treasury yields surging while the stock market sold off.

Financial markets expect the Fed to keep interest rates unchanged at its Oct. 31-Nov. 1 policy meeting, according to CME Group's (NASDAQ:CME) FedWatch. Since March, the U.S. central bank has raised its benchmark overnight interest rate by 525 basis points to the current 5.25% to 5.50% range since March 2022.

"I think that (strong GDP report) has already been incorporated into their thinking," said Yelena Shulyatyeva, a senior economist at BNP Paribas (OTC:BNPQY) in New York. "This has been our view that we have reached the terminal rate for this business cycle."

Growth last quarter was also seen lifted by a smaller trade deficit, thanks to strong exports and increased inventory investment. No impact was expected from the auto strikes, which started in mid-September. But the labor dispute, which is costing auto makers millions of dollars per week, could weigh on growth in the fourth quarter.

"I see a speed bump because of the strikes," said Brian Bethune, an Economics professor at Boston College. "But I don't see that suddenly we'll get thrown overboard."