The US economy grew at an unexpectedly weak rate of 0.6 per cent in the fourth quarter, its slowest pace since 2002, the US commerce department said yesterday, amid continuing fears of a slide into recession in 2008.

While a slowdown in growth was expected after a blistering third quarter, most analysts were looking for annualised growth of between 1 and 1.5 per cent for the quarter.

The weaker-than-expected outcome was driven by a big reduction in inventories, as companies cut back on stocks in anticipation of softer demand. The swing in inventories subtracted 1.25 percentage points from fourth-quarter gross domestic product growth. Analysts said this could be good news for growth in early 2008, as companies may have got rid of surplus stock already.

Meanwhile, inflation came in slightly higher than anticipated, with the core personal consumption expenditure deflator up 2.7 per cent from the previous quarter at an annualised rate, and up 2.1 per cent year-on-year. Analysts said the underlying growth picture was not as bad as the headline number suggested. Real final sales rose at an annualised rate of 1.9 per cent, with a positive contribution from exports.

Domestic demand growth slowed less precipitously than overall growth, to 1.4 per cent from 2.5 per cent in the third quarter. But all the main components of domestic demand were weaker. The housing slump showed no sign of abating, with output plunging 23.9 per cent in the fourth quarter - steeper than the third-quarter's 20.5 per cent drop.

The big surprise, though, was in inventories. Companies swung from building inventories at an annual rate of $30.6 billion in the third quarter to running them down at a rate of $3.4 billion in the fourth. This hammered fourth-quarter growth, but raised the possibility that companies had already made the most significant adjustments to their stockpiles.

While employment in the construction industry fell by 13,000 jobs, and manufacturing employment was flat, employment in the service sector grew by 141,000 jobs.