Feb. 28 (Bloomberg) -- The U.S. economy grew at an annual rate of 2.2 percent in the fourth quarter, slower than the government first estimated, as companies stepped up efforts to curb inventories.

The increase in gross domestic product, the sum of all goods and services produced in the U.S., compares with a 3.5 percent rate reported on Jan. 31, and a 2 percent pace in the third quarter, the Commerce Department said today in Washington. The Federal Reserve's preferred measure of inflation rose less than previously estimated.

The figures now show a more consistent pattern of slower growth over the last nine months of 2006 as housing, then manufacturing, slumped. Cuts in production and fewer orders last month suggest companies are still grappling with excess inventory, confirming the Fed's forecast that the expansion will proceed at a moderate pace.

``There's an inventory overhang, and businesses are still working to clear the decks,'' Brian Bethune, an economist at Global Insight Inc. in Lexington, Massachusetts, said before the report. ``That will linger this quarter. Companies may start to get past that by the second quarter, which is one reason we expect growth to improve later this year.''

For all of last year, the economy grew 3.3 percent, compared with 3.2 percent in 2005.

Economists forecast fourth-quarter growth of 2.3 percent, the median of 76 estimates in a Bloomberg News survey. The report is the second for the quarter and will be revised again next month.

Earlier this week, former Fed Chairman Alan Greenspan was quoted by Associated Press as saying that he couldn't rule out a U.S. recession later this year.

Less Inventory

A drive to trim inventory was the main reason for last- quarter's reduced growth rate. Companies added to inventories at an annual rate of $17.3 billion, compared with the $35.3 billion pace reported Jan. 31 and a $55.4 billion rate of increase in the third quarter. The decrease subtracted 1.35 percentage points from GDP, almost double the 0.7-point estimated last month.

A report yesterday showed companies are in no hurry to boost stockpiles. January orders for durable goods fell 7.8 percent, the most since October, the Commerce Department reported. A gauge of demand for business equipment dropped by the most in three years.

Automakers have been among businesses slashing inventories amid falling sales. Purchases at dropped 17 percent in January at General Motors Corp. compared with the same month last year, prompting a deeper cut in its North American production.

Housing Tumbles

Homebuilding also weighed on growth. Residential construction fell at an annual rate of 19.1 percent, compared with the 19.2 percent rate of decline reported last month and a 18.7 percent drop the previous three months. The decline, the biggest since 1991, subtracted 1.2 percentage points from growth.

An oversupply of unsold houses caused builders to retrench last month, even as reports suggest sales have stabilized. Builders in January started work on the fewest number of new homes since August 1997, a Commerce Department report earlier this month showed.

``The U.S. economy seems likely to expand at a moderate pace this year and next, with growth strengthening somewhat as the drag from housing diminishes,'' Fed Chairman Ben S. Bernanke told lawmakers Feb. 14 during his semi-annual monetary policy testimony.

Former Fed Chairman Greenspan, now a private consultant, earlier this week wasn't as sanguine about the outlook.

Greenspan Comments

``When you get this far away from a recession, invariably forces build up for the next recession, and indeed we are beginning to see that sign,'' Greenspan said via satellite link to a business conference in Hong Kong, according to AP. ``While, yes, it is possible we can get a recession in the latter months of 2007, most forecasters are not making that judgment.''

A bigger trade deficit and less business spending than previously estimated also contributed to today's fourth-quarter revision.

Today's data showed that the core personal consumption expenditures price index, a measure of prices tied to consumer spending and excluding energy and food, rose at an annual rate of 1.9 percent last quarter. The index, which is the Fed's preferred inflation gauge, compared with a 2.1 percent pace reported earlier and a 2.2 percent rate in the prior quarter.

Several Fed policy makers, including Bernanke, have said they would be comfortable with an increase in the 1 percent to 2 percent range for this measure.

The GDP price index, a measure of prices tied to the report rose at an annual rate of 1.7 percent in the fourth quarter, compared with the 1.5 percent estimated in last month's report and a 1.9 percent third-quarter gain.

Consumers Boost Spending

Consumer spending, which accounts for about 70 percent of the economy, remained an area of strength last quarter. Purchases rose at a 4.2 percent annual rate, after growing at a 2.8 percent pace the previous three months. Spending gains have averaged about 3.7 percent a quarter over the past decade.

``I feel very good about the economy,'' Terry Lundgren, chief executive officer of Federated Department Stores Inc., the second-largest U.S. department-store chain, said in an interview yesterday. ``I feel very good about the consumer right now.''

The report showed business investment on equipment and software fell at an annual rate of 3.2 percent, more than previously estimated and the biggest decline since the last three months of 2002.

The Commerce Department also issued revisions to third- quarter income figures today that reflected more complete estimates only available with a lag. The data also took into account previously announced employment revisions.

Personal income grew at a 5 percent annual pace from July through September, compared with a previously reported 5.9 percent gain. Incomes grew at a 4.8 percent annual pace in the fourth quarter, revised down from 4.9 percent.

To contact the report on this story: Joe Richter in Washington jrichter1@bloomberg.net

Last Updated: February 28, 2007 08:30 EST