There was a sharp upward revision to estimates of US growth in the third quarter but an ambiguous report cast doubt on the underlying strength of the world’s largest economy.

Data from the commerce department showed the economy grew at a 2.7 per cent annual rate in the July to September quarter, compared with the 2 per cent estimated last month.

But the cause of the revision was faster growth in business inventories – which cannot be sustained – more than offsetting lower estimates of consumption and business spending on equipment.

That suggests there is less momentum in the economy and it may be more vulnerable to a shock from the fiscal cliff of tax rises and spending cuts due at the end of 2012.

“The real story here is the business inventory build,” said Tim Hopper, chief economist for TIAA-CREF, the insurer and asset manager. Mr Hopper argued the overall picture was positive, with business increasing production, and a stronger contribution from construction. But unless inventories rise further the fourth quarter may be weak.

“Some unusual boosts to the third quarter will not repeat in the fourth,” said Steven Wieting, US economist at Citi Investment Research. “Government outlays rose 3.5 per cent on a 12.9 per cent surge in defence spending, which seems likely to reverse near term.”

Growth in consumption was revised down from an annual rate of 2 per cent to 1.4 per cent, business spending on equipment and software was revised from flat to a fall of 2.7 per cent, but the inventory rise contributed 0.8 per cent to total growth.

Overall, the numbers point to a sluggish economy.

– (Copyright The Financial Times Limited 2012)