By Lucia Mutikani

WASHINGTON (Reuters) - The U.S. economy grew almost 5% in the third quarter, again defying dire warnings of a recession, as higher wages from a tight labor market helped to fuel consumer spending and businesses restocked at a brisk clip to meet the strong demand.

The fastest growth pace in nearly two years reported by the Commerce Department's Bureau of Economic Analysis on Thursday in its advance estimate of third-quarter gross domestic product was also spurred by a rebound in residential investment after contracting for nine straight quarters.

Government spending picked up. But business investment dipped for the first time in two years as outlays on equipment like computers declined and the boost faded from the construction of factories related to a campaign by President Joe Biden's administration to encourage more semiconductor manufacturing in the United States.

Though the blockbuster performance over the summer is likely not sustainable, it showcased the economy's stamina despite aggressive interest rate increases from the Federal Reserve. Growth could slow in the fourth quarter because of the United Auto Workers strikes, the resumption of student loan repayments by millions of Americans and the lagged effects of the rate hikes.

The report also showed underlying inflation subsiding considerably last quarter. 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've seen for a period of time now a post pandemic induced negative bias about an imminent recession and persistent inflation," said Brian Bethune, an economics professor at Boston College. "But not only is the economy surprisingly resilient, we also got productivity-driven growth for two consecutive quarters in 2023, meaning the business cycle still looks very solid."

Gross domestic product increased at a 4.9% annualized rate last quarter, the fastest since the fourth quarter of 2021. Economists polled by Reuters had forecast GDP rising at a 4.3% rate. 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%.

Growth in consumer spending, which accounts for more than two-thirds of U.S. economic activity, accelerated at a 4.0% rate after only rising at a 0.8% pace in the second quarter. It added 2.69 percentage points to GDP growth, and was driven by spending on both goods and services.

Though wage growth has slowed, it is rising a bit faster than inflation, lifting households' purchasing power.

The increase in wages last quarter was partially offset by a rise in personal taxes, resulting in income at the disposal of households after taxes falling at a 1.0% pace. That led to consumers tapping their savings to fund some of their spending. The saving rate dropped to 3.8% from 5.2% in the second quarter.

Stocks on Wall Street fell. The dollar rose against a basket of currencies. U.S. Treasury yields dipped.

SLOWDOWN AHEAD

The declining saving rate combined with the resumption of student loan repayments in October, which economists estimated was equal to roughly $70 billion, or around 0.3% of disposable personal income, could dent spending. Low-income consumers are increasingly relying on debt to fund purchases, with higher borrowing costs boosting credit card delinquencies.

Economists estimate that excess savings accumulated during the COVID-19 pandemic are mostly concentrated among high-income households and will run out by the first quarter of 2024. Some economists see a sharp slowdown around the corner, a concern shared by United Parcel Service (NYSE:UPS), which on Thursday cut its 2023 revenue forecast for the second straight quarter.

But others are not too worried, arguing that spending was not reliant on credit, but rather on the strong labor market and generous government transfers during the pandemic.

"It is too early to take slower growth for granted, especially after three quarters of consistently stronger-than-expected economic activity," said Chris Low, chief economist at FHN Financial in New York. "Any economist working on an update of their estimate of when pandemic savings will run out needs to tear it up and start thinking about what has allowed consumption to remain so strong. It is not borrowing."

Labor market resilience was highlighted by a separate report from the Labor Department on Thursday, showing initial claims for state unemployment benefits rose 10,000 to a seasonally adjusted 210,000 during the week ending Oct. 21, staying in the very low end of their range of 194,000 to 265,000 for this year.

The number of people receiving benefits after an initial week of aid, a proxy for hiring, increased 63,000 to 1.790 million for the week ended Oct. 14, the highest since early May. Economists were divided on whether this was a sign that the unemployed were experiencing longer spells of joblessness or reflected difficulties adjusting the data for seasonal fluctuations.

Inventory accumulation rose at an $80.6 billion pace last quarter, contributing 1.32 percentage points to GDP growth. Businesses relied on imports to restock, resulting in a small trade deficit that imposed a minor drag on GDP growth. Excluding inventories and trade, the economy grew at a solid 3.5% rate.

The GDP data likely has no impact on near-term monetary policy amid a surge in U.S. Treasury yields and a recent stock market selloff, which have tightened financial conditions.

Underlying price pressures abated further, with the price index for personal consumption expenditures (PCE) excluding food and energy rising at a 2.4% rate. That was the slowest pace since the fourth quarter of 2020 and followed a 3.7% pace of increase in the second quarter.

The so-called core PCE price index is one of the inflation measures tracked by the Fed for its 2% target. The U.S. central bank is expected to leave rates unchanged next Wednesday. It has raised its benchmark overnight interest rate by 525 basis points to the current 5.25% to 5.50% range since March of last year.

"From the Fed perspective there is little here to suggest any need to start lowering rates, nor does this suggest an imminent need to raise them again either," said Richard de Chazal, macro analyst at William Blair in London.