US economic growth revised down

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The US economy grew at a pace of 2.2% in the last three months of 2006, down from a previous estimate of 3.5% and below analysts' forecasts.

The contraction came as firms cut their inventories and consumers spent less.

Separate data showed new home sales fell nearly 17% in January from December, the biggest drop since 1994.

Talking about the budget to Congress, Federal Reserve head Ben Bernanke reiterated recent comments that the US had to tackle its deficit urgently.

In testimony to Congress, Mr Bernanke said: "A vicious cycle may develop in which large deficits lead to rapid growth in debt and interest payments, which in turn adds to subsequent deficits."

He said that the US needed to address its welfare and social security costs, as a growing number of baby boomers reach retirement.

The US could be seeing "the calm before the storm", he said.

However, Mr Bernanke gave no indication over which way interest rates could head.

Housing slump

The drop in new homes on Wednesday was far greater than forecast, leaving sales at 937,000 units annually - the lowest level since February 2003, showing further evidence of a US housing slowdown.

The fall came after the US Commerce data showed spending on new home-building fell 19.1% in the last quarter of 2006 - the worst drop since early 1991.

According to the Commerce Department data, the economy grew by 3.3% in 2006, below an earlier estimate of 3.4%.

During the final quarter of 2006, spending by consumers grew at an annualised rate of 4.2%, against an earlier estimate of 4.4%. For the year as a whole, spending grew by 3.2%, down from growth of 3.5% in 2005.

The US Commerce Department figures also showed that exports of goods and services grew at a pace of 10.5% between October and December 2006, compared with 6.8% in the previous three months.

In contrast, imports of goods and services fell at a rate of 2.2% in the quarter, compared with a 5.6% increase in the previous three months.

I think it is unfolding as a slowdown, not a turndown - meaning recession Ken Mayland, president of ClearView Economics

The "core" price index - viewed as a key indicator of future inflation pressures - hit 1.9% for the quarter, down from the 2.1% originally estimated.

'Breather'

Analysts however were not overly concerned by the US Commerce Department figures.

Ken Mayland, president of ClearView Economics, said the latest results were part of a "mid-course breather", showing a temporary setback, rather than a move toward recession.

"I think it is unfolding as a slowdown, not a turndown - meaning recession," he said.

On Tuesday, figures showed sales of big-ticket items fell sharply in January, indicating a slowdown in the manufacturing sector and raising fears over a wider economic strength.

The latest gross domestic product figures are based on a more complete set of data than for the previous 3.5% estimate made in January.