GDP growth figure slashed

WASHINGTON — The U.S. economy grew at a tepid 2.2% pace at the end of 2006, much weaker than first thought, while new-home sales last month had their biggest drop in 13 years, according to data released Wednesday that showed a soft economy.

Adding to that dreary picture, the National Assn. of Purchasing Management-Chicago said its barometer of Midwest business activity slid to 47.9 in February from 48.8 in January. A reading below 50 indicates contraction. Gross domestic product, the broadest measure of overall economic activity within U.S. borders, expanded at an annual rate of 2.2% in the fourth quarter. That was revised down from the 3.5% rate in the government’s previous estimate.

Still, the soft economic picture painted by Wednesday’s data added to expectations that the Federal Reserve was done raising interest rates for now in its battle against inflation.

“Good data is clearly becoming more sparse and today’s reports, if anything, just reinforce the view the Fed is done tightening,” said Mark Meadows, currency strategist at Tempus Consulting.

The Commerce Department’s latest GDP estimate was slightly weaker than the 2.4% rise that economists polled by Reuters had forecast.

As expected, a wider trade deficit also weighed on GDP as more goods than first estimated were imported.

On the inflation front, the closely watched personal consumption expenditures price index declined by a 0.9% rate, the biggest fall since 1954, as energy prices dropped.

The core expenditures price index, which strips out volatile food and energy prices and is closely watched at the Fed, rose 1.9%, a bit below the 2.1% gain first estimated.

For the year, the economy grew 3.3%, down from the 3.4% earlier estimated.

In a sign that businesses are becoming wary about the economy’s health, nonresidential investment spending fell by 2.4% during the quarter. It was the first decline since the first quarter of 2003 and was much weaker than the government’s initial estimate of a 0.4% fall.

Adding to evidence of a troubled housing market, spending on new-home building tumbled 19.1% during the quarter, the worst three-month reading since a 21.7% decline in the first quarter of 1991.

A separate Commerce Department report showed a 16.6% decline in sales of new homes in January, the largest decrease since January 1994.

Prices were little changed as the number of new homes on the market decreased slightly in January. The median sales price inched up $400 to $239,800, compared with December.

On the consumer front, personal spending during the fourth quarter was weaker than first estimated, climbing at a 4.2% annual rate, down from the previous estimate of 4.4%. For the year, spending rose 3.2%, slightly less than the 3.5% gain in 2005.