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Updated from 8:57 a.m. EDT

Growth in the U.S. economy was lower than most economists' expected in the third quarter, the

Commerce Department

said Friday.

Gross domestic product

, a broad measure of the nation's economic activity, rose at 2.7% annual rate in the third quarter, according to preliminary government figures. It was the government's first estimate of GDP, and two more figures will be released in the coming months.

The GDP data conflicted with another report released Friday that showed stronger-than-anticipated growth in durable goods, as well as a key index that showed American consumers remain confident, suggesting that economic growth may not be entering a sustained downturn.

The consensus among economists was for a 3.4% rise in GDP, according to



"The report does confirm that growth has cooled considerably," said James O'Sullivan, an economist at

J.P. Morgan


Friday's figure showed the slowest growth in GDP since the second quarter of 1999, and was considerably lower than the second quarter's final figure of a 5.6% rise.

Much of the shortfall was the result of a faster-than-expected decline in government spending, which fell at a 3.6% rate. Falling business inventories also impacted the fall, the Commerce Department said.

At the same time, the price index for gross domestic purchases, a key inflation measure, increased by 2.4% in the third quarter, compared with an increase of 2.1% in the second quarter. Excluding the often volatile food and energy sector, the price index for gross domestic purchases rose 1.9%, compared with an increase of 1.7% in the second quarter.

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The major contributors to the GDP figure were increases in personal consumption expenditures, exports and non-residential fixed investments.

Consumer spending, which accounts for two-thirds of GDP, rose 4.5%, compared with an increase of 3.1% in the second quarter.

Disposable personal income

increased $81.1 billion in the third quarter, compared with an increase of $98.4 billion in the second, while Americans' personal saving rate declined to a record low of negative 0.2%.

The data is unlikely to alter the view that the Federal Reserve will leave interest rates unchanged at its meeting Nov. 15. Over the last 16 months, the Fed has raised interest rates six times in an effort take the U.S. economy into a so-called "soft landing." The aim is to slow the economy and keep inflation in check, while allowing productivity to thrive.

However, if the sluggish pace of the economy continues, the Federal Reserve could be prodded to lower rates to kickstart economic growth, said one economist.

"If the Q3 pace of growth persisted for another quarter or two, the Fed would be likely to ease," said Bruce Steinberg, chief economist at

Merrill Lynch


While most economists consider the economic growth of recent quarters -- such as the 8.3% pace in last year's fourth quarter and the 5.6% rate in this year's second quarter -- to be unsustainable, the key question is whether growth rebounds in the second quarter.

"This report does not provide any info on the more important issue of what happens next -- does growth stabilize in the 3% to 4% range, or keep weakening?" said O'Sullivan, who expected September GDP to settle in at a 3.5% annual rate.

In other economic news Friday, the Commerce Department said orders for

durable goods

-- a measure of demand for items meant to last three years -- increased 1.8% in September, after rising a revised 3.5% in August. Initially, the government estimated that August orders rose 2.9%.

This figure was higher than the Wall Street consensus of a 0.8% rise, according to



Year to date, new orders are up 8.9%.

Orders for electronics and electrical equipment accounted for the bulk of the increase, rising $4.8 billion, or 11.8%, to $45.3 billion. And transportation equipment, up four of the last five months, increased $2.5 billion, or 5.1%, to $51.9 billion.

Meanwhile, consumers remained confident in the economy, according to a survey by the

University of Michigan

. Its consumer sentiment index for October was 105.8, down only slightly from 106.8 in September.