March 29 (Bloomberg) -- The U.S. economy grew at an annual pace of 2.5 percent last quarter, hobbled by slumps in home building and in corporate spending that show few signs of abating.

The third and final estimate of gross domestic product for the period from October to December compares with the 2.2 percent reported last month and an initial calculation of 3.5 percent, the Commerce Department said today in Washington.

Increases in mortgage defaults and foreclosures threaten to delay housing's recovery from its worst recession in 15 years, raising the prospect of a prolonged economic slowdown. The Federal Reserve's prediction that the economy will continue to expand at a moderate pace hinges largely on the job market and rising wages. The Labor Department said today that jobless claims unexpectedly fell to the lowest since January.

``There is no question growth will be slower this quarter and the next,'' said Nariman Behravesh, chief economist at Global Insight Inc. in Lexington, Massachusetts. ``Housing is looking to be in a deeper downturn and capital spending is looking quite weak. Employment growth is enough to keep consumers spending.''

The difference between the second and third estimates of growth was that inventories grew more than previously thought, suggesting production may be slow to pick up. Stockpiles subtracted 1.2 percentage points from growth, less than the 1.4 percentage points previously estimated.

Little Help

``More notable than the aggregate revision per se were the sources of revision,'' said Peter Kretzmer, a senior economist at Banc of America Securities LLC in New York. ``The slightly higher inventory accumulation in the final report does not add to economic momentum.''

On a more positive note, the number of Americans filing first-time claims for unemployment benefits dropped last week to 308,000. Economists surveyed by Bloomberg News anticipated claims would rise to 320,000. The four-week average, a less volatile measure, fell to 316,750 from 324,000.

Today's GDP report showed 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 1.8 percent last quarter. The index, which is watched by the Fed, rose at a 2.2 percent rate in the third quarter.

The Dow Jones Industrial Average gained 48.39, or 0.4 percent, to 12,348.75 in New York. The Standard & Poor's 500 Index added 5.30, or 0.4 percent, to 1422.53.

Final Accounting

For all of last year, the economy grew 3.3 percent, compared with 3.2 percent in 2005. The third quarter's growth rate was 2 percent.

Economists surveyed by Bloomberg News had forecast fourth- quarter growth at 2.2 percent, according to the median of 75 estimates. Estimates ranged from 2 percent to 2.5 percent.

``The fourth-quarter softness is overwhelmingly laid at the doorstep of the housing slowdown,'' said Richard DeKaser, chief economist at National City Corp. in Cleveland. ``The drag will be with us all year, though not at the rates we saw last year.''

Home construction fell at an annual rate of 19.8 percent, the most since 1991, after an 18.7 percent drop the previous three months. The decline subtracted 1.2 percentage points from growth.

The housing slowdown remains one of the biggest concerns this year, economists said. New-home sales fell last month to the lowest level in almost seven years, a government report this week showed. While February housing starts rebounded in February from a nine-year low, building permits, a sign of future construction, declined.

Mortgage Woes

Rising defaults by subprime mortgage borrowers, or those with poor or limited credit histories, are damping prospects for a quick housing recovery. More foreclosures increase the possibility that builders and sellers will have to compete with a bigger glut of properties on the market, pushing down prices.

Fed Chairman Ben S. Bernanke yesterday said the damage from the mortgage crisis would be limited and maintained the central bank's growth forecasts.

``Consumers continue to spend and continue to feel confident enough to spend in spite of the adjustment we've seen in the housing sector,'' Commerce Secretary Carlos Gutierrez said in an interview in Washington.

So far, builders see no improvement. Lennar Corp., the largest U.S. homebuilder by revenue, this week reported a 73 percent plunge in fiscal first quarter earnings, and said it may miss its 2007 profit goal.

``Market conditions are very difficult across the country,'' Miami-based Lennar's Chief Executive Officer Stuart Miller said on a conference call. ``It is unclear today where there is another shoe to drop.''

Inventories Swell

A bigger increase in inventory than previously estimated was the main reason for today's GDP revision. Stockpiles rose at an annual rate of $22.4 billion, compared with last month's $17.3 billion estimate.

Companies also tightened their purse strings. Business fixed investment, which includes spending on commercial construction as well as equipment and software, fell at an annual rate of 3.1 percent in the fourth quarter, compared with a 10 percent increase the prior quarter.

The same reluctance to invest this quarter may continue to hinder growth, economists said.

Orders for durable goods excluding transportation unexpectedly fell for a second month in February, Commerce reported yesterday. Orders for non-defense capital goods excluding aircraft, a proxy for future business investment, also declined, the report showed.

Bright Spot

Consumer spending, which accounts for more than two-thirds of the economy, remained a bright spot. It expanded at a 4.2 percent annual pace in the fourth quarter after a 2.8 percent gain in the third quarter. Consumer spending added 2.9 percentage points to growth.

Today's GDP report included a first look at corporate profits for the quarter. Earnings adjusted for the value of inventories and depreciation of capital expenditures, known as profits from current production, fell 0.3 percent to an annual rate of $1.65 trillion. Profits rose 3.9 percent in the third quarter. For all of last year, profits were up 21 percent.

Former Fed Chairman Alan Greenspan, citing concern about slowing profit margins, said this month there's a ``one-third probability'' of a recession this year and the current expansion won't have the staying power of its decade-long predecessor.

For Fed policy makers, inflation is a ``greater risk'' than slowing growth, Bernanke said yesterday.

To contact the report on this story: Shobhana Chandra in Washington schandra1@bloomberg.net

Last Updated: March 29, 2007 17:15 EDT