TOKYO (Reuters) - Recession-hit Japan suffered a fresh blow on Thursday as data showed a key gauge of capital spending tumbled in October - a worrying sign for its recovery given that business investment was a big drag on the economy in the third quarter.

The machinery order data is a stark reminder of the challenges facing Prime Minister Shinzo Abe, who heads into an election on Sunday seeking a fresh mandate for his economic-revival strategy that critics have panned as a failure.

Abe is expected to win the election comfortably, but doubts about his Abenomics recipe of aggressive monetary stimulus, fiscal spending and pro-growth reform have sharpened since Japan unexpectedly slipped into a recession in the third quarter.

The slump was triggered by a sales tax hike in April, which chilled consumption, while capital expenditure also carved out a big slice off output, sliding a bigger-than-expected 0.4 percent in the third quarter.

The 6.4 percent on-month fall in core machinery orders, a highly volatile data series seen as an indicator of capital spending in the coming six to nine months, suggests business investment will struggle to underpin a rebound in the economy.

The figure issued by the Cabinet Office was far worse than a 2.4 percent fall forecast by economists in a Reuters poll, and followed a 2.9 percent month-on-month gain in September.

Firms activity in domestic output is unlikely to gather strength until they get rid of inventory that piled up after the tax hike, said Kenta Ishizu, economist at Mizuho Securities.

I dont think capital spending will be accelerating ahead. As long as the economy remains weak, companies will continue to revise down their spending plans.

The government sees capital spending picking up, though some analysts say sluggish domestic demand after Aprils sales tax hike will continue to drag on business investment.

The Bank of Japans tankan showed firms positive stance on investment. But companies have so far been slow to implement their spending plans and remain wary of boosting wages, highlighting the challenges Abe and the BOJ face in nursing the economy to sustainable growth and meeting the central banks 2 percent inflation goal.

Core orders are seen slipping 0.3 percent in the current quarter after bouncing to a 5.6 percent gain in July-September.

They would need to grow 3.3 percent each in November and December in order to prevent a quarter-on-quarter decline in the final three months of 2014, a Cabinet Office official said.

Abes strategy to spark durable growth in the worlds third-largest economy and cast off 15 years of grinding deflation has had only partial success.

The stock market has rallied sharply since Abe came to power in December 2012, while the yens sharp slump has allowed export companies to reap windfall profits, though very little of these have been ploughed into new investment or wage increases.

The BOJ is likely to cut its inflation forecasts next month, making its 2 percent inflation goal look ever more ambitious, just few months after its shock decision on Oct. 31 to expand its already massive asset purchases.

(Editing by Shri Navaratnam)

WASHINGTON (Reuters) - The US economy grew at a much faster pace than initially thought in the third quarter, pointing to strengthening fundamentals that should help it weather slowing global demand.

The Commerce Department on Tuesday raised its estimate of GDP growth to a 3.9 percent annual pace from the 3.5 percent rate reported last month, reflecting upward revisions to business and consumer spending, as well as to inventories.

The rise in output followed a 4.6 percent advance in the prior three months to mark the two strongest back-to-back quarters since the second half of 2003. It underscored the economys resilience against a backdrop of a Japanese recession, an anemic euro zone and a slowing China.

This report will go some way in providing further confirmation about the sustainability of the current economic recovery, said Millan Mulraine, deputy chief economist at TD Securities in New York.

Economists had expected growth would be trimmed to a 3.3 percent pace. When measured from the income side, the economy grew at its fastest pace since the first quarter of 2012.

But the otherwise upbeat picture was marred somewhat by other data showing consumer confidence sliding to a five-month low and a further moderation in house price gains.

US stocks were little changed while the dollar slipped against a basket of currencies. Prices for US Treasury debt rose marginally.

The ebb in consumer confidence in November was surprising given falling gasoline prices and a firming jobs market.

Economic growth is strong and getting stronger by the day. The consumer gets it, even if they arent yet saying it, said Chris Rupkey, chief financial economist at MUFG Union Bank in New York.

The third quarter was the fourth out of the past five that the economy has expanded above a 3.5 percent pace, well above the level economists consider to be trend.

Some of the momentum appears to have carried over into the final three months of the year, with data from manufacturing to employment and retail sales suggesting continued strength.

But with inventories rising more than previously estimated in the third quarter, economists expect the pace of restocking to slow, holding growth below a 3 percent pace in the fourth quarter.


Highlighting the economys strong fundamentals, growth in domestic demand was raised to a 3.2 percent pace from the previously reported 2.7 percent rate.

This is vindication for the Federal Reserve that they downplayed concerns overseas and its appropriate to speak about rate hikes next year, said Christopher Low, chief economist at FTN Financial in New York.

The US central bank has kept benchmark borrowing costs near zero since December 2008, but is expected to start raising them around the middle of next year.

Consumer spending, which accounts for more than two-thirds of US economic activity, was revised up to a 2.2 percent pace in the third quarter from the previously reported 1.8 percent rate.

Business spending on equipment was raised to a 10.7 percent rate from a 7.2 percent. While exports grew, the pace was less brisk than previously reported, leaving trade contributing only 0.78 percentage point to GDP growth instead of 1.32 percentage points.

Growth in wages and salaries was revised lower for both the second and third quarters. Economists said that brought the GDP-based wages and salaries measures into line with earnings figures from the governments survey of nonfarm employers.

This should ease concerns that the Fed was falling behind the curve due to mismeasured wage inflation data, said Michael Feroli, an economist at JPMorgan in New York.

(Reporting by Lucia Mutikani; Additional reporting by Richard Leong in New York; Editing by Paul Simao)

Together with a 4.6 percent surge in the spring, the country has recorded its biggest back-to-back quarterly performance since 2003.

The question of whether the economy is accelerating or will accelerate is no longer a question; we can say somewhat definitively that the economy has already accelerated, said Dan Greenhaus, chief strategist at BTIG, in a research note.

In contrast, other advanced economies are struggling.

The eurozone economy barely grew in the third quarter, and inflation is a mere 0.4 percent, raising concerns of deflation. Japan unexpectedly found itself back in recession in the July-September period. And momentum in emerging economies like China and Brazil is also shaky.

Tuesdays data further pushes the worlds biggest economy onto a different page than Europe and Japan, said Jennifer Lee, senior economist at BMO Capital Markets.

Fueling third-quarter growth was consumer spending, which accounts for 70 percent of economic activity. That climbed at a 2.2 percent rate in the three-month period, an improvement from an initial estimate of 1.8 percent. Business investment in equipment shot up at a 10.7 percent rate, revised up from 7.2 percent.

GDP has been on a roller coaster this year. It started with a steep slide in activity in the first three months of the year when the economy contracted at a 2.1 percent rate, largely due to a severe winter.

Analysts believe momentum could decelerate to around 2.5 percent in the current quarter but then pick up again in 2015. They expect growth of around 3 percent, representing a sustained acceleration in activity six years after the Great Recession.

Since the recession ended in June 2009, growth in the US has averaged at subpar rates just above 2 percent. The lackluster recovery has been blamed on the financial crisis and the severity of the recession. Such downturns are usually harder to recover from because it requires repairs to the banking system to get credit flowing again.

But economists believe 2015 will be the year when the recovery shifts into a higher gear, in part because they expect the government itself to help. Government spending grew at a 4.2 percent rate in the third quarter, the strongest performance since the spring of 2009. The gain was bolstered by a 16 percent surge in defense spending.

The optimism is being fueled by modifications in government budget and tax policies. Across-the-board cuts in government spending and tax increases approved to control huge budget deficits had been holding back growth. By next year, economists believe a better budget picture will begin to pay off and fuel growth.

Meanwhile, an improving job market is expected to provide households with more income, boosting consumer spending. The sharp drop in oil prices should also put more money in Americans pocketbooks as they spend less at the pump.

To be sure, weakness overseas and another possible recession in Europe may still hamstring US growth. Those concerns rattled financial markets earlier this fall. But stocks have since rebounded to new highs amid signs that central banks in Europe, Japan and China will take action to bolster growth.

The US economy is also relatively insulated from overseas weakness since exports account for less than 14 percent of US activity, one of the lowest such shares in the world.

The Federal Reserve in October ended purchases of bonds aimed at pushing long-term interest rates down, though language used by the Fed shows that it does not expect to begin raising short-term interest rates for a considerable time. Many economists believe the Feds benchmark short-term rate, which has been at a record lows near zero for six years, wont start rising until the middle of next year.

ACCORDING to new data released today, Americas economy grew at a 3.9% annual pace in the third quarter of this year. That was an upward revision from the advance estimate, of 3.5%. It came on the heels of a second quarter in which real output expanded at a 4.6% rate. Indeed, in four of the last five quarters GDP has increased by 3.5% or more (and by 4.5% or more in two of the last five quarters). The American economy hasnt strung together five quarters like that since the late 1990s.Neither is that the only encouraging indicator. Over the last year employment has grown at the fastest pace since 2006 and the pace of hiring seems to be trending upward.

It is so tempting to conclude that all is at last well in America. But is it? Take another look. Real output grew just 2.4% from the third quarter of 2013 to the third quarter of this year. That, of course, is due to the woeful first quarter, in which the economy shrank at a 2.1% annual pace; at least some of the robustness of recent figures is surely attributable to make-up of ground lost in the first three months of the year. The 2.4% year-on-year rate is entirely unexceptional, even by the standards of this recovery; indeed, it is close to bang on the trend since 2010. Meanwhile, growth in both wages and prices is remarkably weak. Growth in average weekly earnings has been just 2.8% over the last year: fairly normal for this recovery and well below the rates in past expansions. Meanwhile, the price index for personal consumption expenditures (the inflation measure targeted by the Federal Reserve) rose just 1.5% in the third quarter, down from a 1.6% increase in the second quarter.

And this is all occuring, of course, in a world in which the Feds main policy rate is nearly zero (while its balance sheet stands at $4 trillion). Things are clearly still amiss in America when monetary policy can remain so far from normal while the economy revs up even as inflation and wage growth limp along at pitifully low levels.

Despite the absence of inflationary pressure the Fed is nonetheless preparing to normalise; the first rate hikes could come next year, and possibly as early as the first half of next year if American growth accelerates. Yet the Fed will surely be keeping an eye on the things to see which of several possible narratives might best fit this strange, strange set of datapoints.What sort of narratives?

One would be an economy in which recent GDP data paint a misleadingly rosy picture of things. Fast growth in the last two quarters could be part volatility and part a rebound from the snowy start to the year, in this story, and we should anticipate reversion to a slower growth rate more in keeping with the signals sent by prices and wages. This story, though quite plausible, becomes less attractive with each encouraging datapoint. This suggests the Fed should be watching closely for any sign of a growth slippage.

A second might be an economy that has gotten quite lucky, in its way. The American economy is relatively closed, and so a growth slowdown doesnt hurt growth very much via a trade channel but can help growth if resulting weak inflation is good for consumers. It might be the case that the economy is fundamentally unchanged from where it was a year or two ago, but has received a boost from the falling cost of petrol and other commodities (and perhaps also from the abatement of government deficit reduction). In this case the Fed should again be on the lookout, but for indications that disinflationary tailwinds are flagging or that the economy is approaching capacity, either of which trends could nudge up inflation.

A third might be a secular stagnation world. The Fed has finally succeeded in getting growth going, but it most likely has only managed this by creating dangerous and unsustainable increases in asset prices. In this story the Fed faces a nasty choice: to try to identify the most worrying sorts of excess and rein them in at the cost of growth, or to tolerate growing financial instability in hopes the fall-out is relatively harmless.

A fourth might be a world in which underlying productivity potential is finally growing nicely, thanks in part to information technology advances, new digital business models, and the tremendous boost from American energy production. These trends are allowing growth in output to run ahead of growth in employment. Yet technology is also keeping a lid on wage growth, thanks to possibilities for automation and innovative business models that tap into new sources of labour supply. In this world, the Fed need not worry much about overshooting; indeed, the hotter it runs the economy the more quickly new cost-saving technologies will be exploited.

Any of these might be true. What the Fed ought also to remember is that it remains stuck within one well-established narrative: that of the zero interest rate world. In that world, growth can chug along nicely in the absence of nasty surprises, but quickly falters when they arise. In that world inflation expectations can be nudged upward by expasionary policy or rising commodity prices but always plateau and eventually begin falling back toward zero. And in that world the time at which a low-inflation economy is expected to be strong enough to handle sustained interest rate increases always looms just over the horizon.

The American recovery has been looking impressive lately, but that is nothing to take for granted, not while interest rates and inflation are so low and the rest of the world economy so shaky.