The US economy grew last summer at its second-fastest pace in two years, the Commerce Department confirmed yesterday.

US gross domestic product (GDP), or output of goods and services, grew at a seasonally adjusted 4 per cent annual rate from July to September - the second-fastest growth seen since early 2000. The economy since then, however, has stumbled under the weight of renewed anxiety over war, terrorism and corporate malpractice.

It appears to have stabilised over the past two months, but GDP growth in the fourth quarter is expected to be anaemic, below 2 per cent, with businesses still reluctant to expand operations.

The report's readings on profits were mixed. Before adjustments for inventories and depreciation, profits were shown to have risen for three consecutive quarters for the first time since the stock market bubble burst in early 2000; after such adjustments, profits fell for the third consecutive quarter.

The report was the department's last of three routine estimates of quarterly GDP. The headline growth figure was unrevised; only slight changes were made to significant components. Inventory estimates were revised up, suggesting that business confidence was stronger than at first apparent.

The release followed Mr Alan Greenspan's speech on Thursday night to the Economic Club of New York in which he said the economy was "working its way" through last summer's "soft patch", but faced a series of problems, risks and new complexities.

Uncertainties over Iraq and the business outlook were restraining investment, a critical ingredient to faster economic growth, he said. When those concerns cleared, he said, growth might accelerate.

"The limited evidence since the November easing has supported our view that the US economy has been working its way through a soft patch," he said.

The Fed chairman devoted considerable time to the continuing debate over deflation and whether the Fed should have done more to deflate pre-emptively the stock market bubble of the late 1990s.

He repeated earlier remarks that "the US is nowhere close to sliding into a pernicious deflation", but acknowledged "well-founded" reasons to presume deflation was a bigger threat to the US economy than inflation. He gave assurances the Fed could go beyond lowering short-term interest rates and also lower longer-term interest rates if at all necessary. "Clearly, it would be desirable to avoid deflation," he said, "but if deflation were to develop, options for an aggressive monetary policy response are available."