WASHINGTON (Reuters) - Growth in the U.S. economy slowed abruptly in the fourth quarter as consumers curbed spending and home building plunged, according to a government report on Wednesday that kept fears of recession alive.

U.S. growth skidded lower in the fourth quarter and was the weakest in five years for all of 2007, according to a government report on Wednesday that highlighted the toll an enfeebled housing sector has taken on the national economy. REUTERS/Graphics

The Commerce Department said gross domestic product, a measure of total goods and services output within U.S. borders, grew at an annual rate of 0.6 percent in the last quarter of 2007, while it expanded 2.2 percent over the whole year, the slowest pace in five years.

“No question, the GDP number tells us the economy is on the brink of recession, if not in one already,” said Peter Boockvar, an equity strategist with Miller Tabak & Co. in New York.

A private sector report showing employers added three times as many jobs as expected in January lifted some of the gloom surrounding the growth figures. ADP Employer Services said U.S. private employers added 130,000 jobs in January.

That led some analysts to boost forecasts for the number of new jobs in January, which the Labor Department will announce on Friday in its closely watched report on U.S. hiring.

There have been other reassuring hints recently of resilience in the economy, including robust orders for manufactured goods in December and lower weekly claims for jobless benefits.

That did not stop the U.S. Federal Reserve from cutting its benchmark federal funds rate by one-half percentage point to 3 percent, citing a deepening of the housing slump and some softening in labor markets.

U.S. stocks rallied after the cut in benchmark U.S. short-term interest rates -- the second in just over a week -- but quickly shed the gains after a CNBC television report that said two big bond insurers faced possible ratings downgrades.

The Dow Jones industrial average and the Nasdaq Composite Index each ended modestly lower.

Bonds were mixed, with shorter maturities rising in price after the latest Fed rate cut, while 30-year bonds declined because of investor concern that inflation risks were rising.

MOMENTUM WANING

Some economists noted that the GDP report indicated a disconcerting rise in prices, but the Fed said it expected inflation to moderate in the coming quarters. That would give the U.S. central bank more leeway to cut rates even further.

The White House said the GDP report did not change its economic outlook and officials cited the slowdown as a reason to urgently pass a fiscal stimulus package that is waiting for Congressional approval.

“We’re not happy with 0.6 percent growth,” Commerce Secretary Carlos Gutierrez said in a telephone interview. “This is why we need to get that stimulus package out the door as soon as possible and get checks into the hands of consumers as soon as possible.”

The U.S. House of Representatives has approved measures worth about $146 billion, but the White House is squabbling with the Senate over lawmakers’ calls for a more substantial boost including extended unemployment insurance benefits.

The chairman of the Joint Economic Committee, New York Democratic Sen. Charles Schumer, took up the cudgels for swift action on a bigger stimulus: “When quarterly economic growth slows to 0.6 percent, alarm bells should be going off urging Washington to give the economy a good shot in the arm.”

RATE DISAPPOINTS

Analysts surveyed by Reuters had forecast that fourth-quarter GDP would grow at a 1.2 percent rate -- twice as fast as it did. Lackluster fourth-quarter performance followed a booming third quarter when GDP surged at a 4.9 percent rate.

A downward spiral in the housing sector took a heavy toll on growth in late 2007 and that drag is likely to continue.

Spending on building new homes plunged 23.9 percent in the fourth quarter, the biggest quarterly drop in 26 years, after falling 20.5 percent in the third quarter. Over the course of the full year, residential spending fell 16.9 percent, the worst annual performance since 1982.

While applications for U.S. home mortgages jumped to a four-year high last week -- normally a sign of housing-industry vigor -- it was mainly because people were refinancing existing mortgages, the Mortgage Bankers Association said on Wednesday.

The GDP report also showed prices were bubbling higher, as a gauge favored by the Fed, the index of personal consumption spending excluding food and energy items, rose at a 2.7 percent annual rate in the fourth quarter, well ahead of the third quarter’s 2 percent increase and Wall Street expectations.

One factor that slowed fourth-quarter GDP was a decision by businesses to sell off inventories. The report said the shift from an inventory build-up to a draw-down cut more than a full percentage point from growth.

Consumer spending, which fuels more than two-thirds of U.S. economic growth, slowed in the fourth quarter to a 2 percent annual rate compared with 2.8 percent in the third quarter.

Growth in consumer spending for 2007 was the softest since 2003, a further indication that a weakening housing market is putting a strain on household finances and confidence.