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Last Updated: Friday, 27 January 2006, 15:25 GMT
US growth suffers sharp slowdown
US consumer shops for new car
US consumers cut down on spending on cars during the period
US economic growth slowed to its weakest rate of growth in three years in the last quarter of 2005.

The economy grew at an annual rate of 1.1% from October to December, compared with 4.1% in the previous three months.

The drop was caused by reduced consumer spending amid soaring fuel prices, while the government also tightened its pursestrings post-Hurricane Katrina.

But, economists predicted the drop was a temporary setback rather than the start of a long-term trend.

"The economy hit a pothole in the fourth quarter. I'm not at all worried about the health of the economy," Mark Zandi, chief economist at Moody's Economy.com said.

Spending slide

Experts said two main factors had driven the drop - a overall slowdown in consumer spending, from 4.1% to 1.1%, and a sharp 17.5% fall in spending on big-ticket goods, particularly cars.

The fall marked the steepest drop in spending on so-called "durable goods" since the first quarter of 1987.

Analysts added that the GDP report partly reflected the impact of Hurricanes Katrina and Rita, which battered the Gulf Coast region in September.

The storms shut down many oil refineries in the region, as well as destroying homes and pushing up unemployment claims.

"Taking it at face value, the hurricane played a big role in contributing to the weakness," said economist Richard DeKaser of National City Corp. in Cleveland.

"Consumer spending was abysmal in October and November. It's an extremely weak report overall."

Inflation pressures

However, while consumer spending slipped, price inflation rose during the period - with core inflation, which strips out volatile energy and food costs, accelerating to a 2.2% rate of growth from 1.4% last time.

The news could prevent the Federal Reserve from implementing any near-term increases in interest rates.

"The data will generate a debate at the Fed about how many more rate hikes there will be," said JVB Financial chief economist William Sullivan.

The US central bank is set to hold its next rates meeting next week.

It has been steadily increasing rates over the past 18 months in an effort to keep inflationary pressures in check.

While commentators widely expect the Fed to implement another small rise in rates on the 31 January, they remain unsure whether the cycle will continue at the next meeting in March.

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