US economic growth rebounded strongly in the third quarter amid a shrinking trade deficit, new figures show today.

But the figures overstate the economy's health as domestic demand was the weakest in two years because of the Federal Reserve's aggressive interest rate hikes.

The Commerce Department's advance third-quarter gross domestic product report today also showed residential investment contracting for a sixth quarter in a row as the housing market buckles under the weight of surging mortgage rates.

While overall inflation slowed substantially from the second quarter, price pressures continued to bubble.

Still, the rebound in growth after two quarterly declines in GDP was further evidence that the economy was not in a recession, though the risks of a downturn have increased as the Fed doubles down on rate hikes to battle the fastest-rising inflation in 40 years.

US gross domestic product increased at a 2.6% annualised rate last quarter after contracting at a 0.6% pace in the second quarter.

Economists polled by Reuters had forecast GDP growth rebounding at a 2.4% rate. Estimates ranged from as low as a 0.8% rate to as high as a 3.7% pace.

The trade deficit narrowed sharply in part as slowing demand curbed the import bill. Exports also increased for much of the quarter.

The smaller trade gap added 2.77 percentage points to GDP growth, the most since the third quarter of 1980.

Final sales to private domestic purchasers, which exclude trade, inventories and government spending, edged up at a 0.1% rate, a sign that higher borrowing cost were starting to erode demand.

That was the slowest rise in this measure of domestic demand since the second quarter of 2020 and followed a 0.5% rate increase in the second quarter.

The data will likely have little impact on monetary policy, though Fed officials could draw some comfort from the ebbing demand.

September personal consumption expenditures price data and third-quarter labour cost numbers due on Friday could carry more weight ahead of the Fed's November 1-2 policy meeting.

The Fed has raised its benchmark overnight interest rate from near zero in March to the current range of 3-3.25%, the swiftest pace of policy tightening in a generation or more.

Growth in consumer spending, which accounts for more than two-thirds of US economic activity, slowed to a 1.4% rate from the April-June quarter's 2.0% pace.

Business spending on equipment rebounded solidly, while government expenditures ended five quarters of decline in a row.

Consumer spending is being supported by a strong labour market, which is driving up wages. The Labor Department reported today a modest rise in the number of people filing new claims for unemployment benefits last week.

Initial claims for unemployment benefits increased 3,000 to a seasonally adjusted 217,000 for the week ended October 22.

Claims have remained significantly low despite reports of companies, mostly in the interest-rate-sensitive sectors of the economy, laying off workers.

There was some encouraging news on the inflation front. A measure of inflation in the economy rose at a 4.6% rate, decelerating from a 8.5% pace of increase in the second quarter.

As a result, income at the disposal of households after accounting for inflation rebounded at a 1.7% pace after decreasing at a 1.5% rate in the second quarter.

But US inflation remains uncomfortably high. The personal consumption expenditures price index excluding the volatile food and energy components rose at a 4.5% rate after increasing at a 4.7% rate in the prior quarter.

Inventories remained a drag on growth. Economists worry that a rising stockpile of unsold goods could trigger a recession.

Retailers are finding themselves saddled with excess merchandise, because of easing supply chain bottlenecks and ebbing demand for goods, forcing them to offer discounts, which economists say may not be enough.