By Lucia Mutikani

WASHINGTON (Reuters) - The U.S. economy slowed in the third quarter as previously reported, but the pace was likely strong enough to keep growth on track to hit the Trump administration's 3 percent target this year, even as momentum appears to have moderated further early in the fourth quarter.

Gross domestic product increased at a 3.5 percent annualized rate, the Commerce Department said on Wednesday in its second estimate of third-quarter GDP growth. That was unchanged from its estimate in October and well above the economy's growth potential, which economists estimate to be about 2 percent.

The unrevised third-quarter GDP reading reflected a faster pace of inventory accumulation and more business spending on equipment than initially thought that was offset by downward revisions to consumer spending and exports. The economy grew at a 4.2 percent pace in the April-June quarter.

Strong growth last quarter likely keeps the Federal Reserve on course to raise interest rates in December for the fourth time this year. Fed Chairman Jerome Powell said on Wednesday he expected solid growth, low unemployment and inflation near the U.S. central bank's 2 percent target.

But Powell appeared to signal the Fed's monetary policy tightening campaign was nearing an end. Powell has faced intense criticism from President Donald Trump, who has viewed the rate hikes as undercutting the White House's economic and trade policies.

The dollar fell against a basket of currencies on Powell's rate comments, while U.S. Treasury prices rose. Stocks on Wall Street rallied.

Growth is being driven by the Trump administration's $1.5 trillion tax cut package, which has given consumer spending a jolt and supported business investment. The fiscal stimulus is part of measures adopted by the White House to boost annual growth to 3 percent on a sustainable basis.

An alternative measure of economic growth, gross domestic income (GDI), increased at a rate of 4.0 percent in the third quarter, quickening from the second quarter's 0.9 percent pace.

The average of GDP and GDI, also referred to as gross domestic output and considered a better measure of economic activity, increased at a 3.8 percent rate in the July-September period, up from a 2.5 percent growth pace in the second quarter.

The income side of the growth ledger was buoyed by after-tax corporate profits, which increased at a 3.3 percent rate last quarter after rising at a 2.1 percent pace in the April-June period.

But dark clouds are gathering over the economic expansion that is now in its ninth year and the second longest on record. The goods trade deficit widened further in October, pressured by declining exports of soybeans, capital goods and automobiles, the Commerce Department said in another report on Wednesday.

WEAK HOUSING MARKET

New home sales tumbled in October, the latest indication that the housing market was softening because of higher interest rates, a third report showed.

Data released last week showed business spending on equipment weakening in October and it could remain tepid with Brent crude oil prices slumping by more than 30 percent from a four-year high above $86 in early October. Cheaper oil tends to hurt investment in the energy sector because of reduced profits.

General Motors Co (GM.N) said on Monday that it would cut thousands from its North American workforce, slash production and eliminate some slow-selling car models, which could have ripple effects on the domestic economy.

Growth estimates for the fourth-quarter are currently around a 2.5 percent pace. Economists expect GDP growth to slow further in 2019 as the fiscal stimulus fades and the effects of a bitter trade war with China as well as a strong dollar take their toll.

"Growth will slow in the near term," said Gus Faucher, chief economist at PNC Financial Services in Pittsburgh. "A trade war remains the biggest downside risk."

The third-quarter growth slowdown mostly reflected the impact of Beijing's retaliatory tariffs on U.S. exports, including soybeans. Farmers front-loaded shipments to China before the tariffs took effect in early July, boosting second-quarter growth. Since then, soybean exports have declined every month, increasing the trade deficit.

Imports increased a bit faster in the third quarter than previously estimated while the drop in exports was much sharper. The resulting larger trade gap sliced off 1.91 percentage points from GDP growth in the third quarter, instead of the 1.78 percentage points reported last month. That was the most since the second quarter of 1985.

Imports were driven by strong domestic demand and a rush by businesses to stockpile before U.S. import duties, mostly on Chinese goods, came into effect late in the third quarter.

Imports subtract from GDP growth. But some of the imports likely ended up in warehouses, adding to the stockpile of inventory, which contributed to GDP.

Inventories increased at an $86.6 billion rate, instead of the $76.3 billion rate estimated in October. Inventory investment added 2.27 percentage points to GDP growth. That was more than the 2.07 percentage points reported last month and was the biggest contribution since the fourth quarter of 2011.

Growth in consumer spending, which accounts for more than two-thirds of U.S. economic activity, increased at a 3.6 percent rate in the third quarter, down from the 4.0 percent rate estimated in October.

Business spending on equipment rose at a 3.5 percent rate, instead of the previously reported 0.4 percent rate. That was still the slowest pace in two years. The moderation in business spending has been blamed on the import tariffs, which are increasing manufacturing costs for companies.

(Reporting by Lucia Mutikani; Editing by Andrea Ricci)