The US economy suffered its first decline for six years in the final quarter of 2007, indicating that the impact of the credit crunch was more severe than previously thought, according to figures released yesterday. Other new data showed that gross domestic product grew by a lower than expected annualised rate of 1.9 per cent in this year’s second quarter.

The Commerce Department said that the US gross domestic product declined by 0.2 per cent on an annualised basis, in the fourth quarter of last year, compared with the previous three months. It had previously calculated that the GDP for the period grew by an annualised 0.6 per cent.

The department issued its revision along with new data showing that the world’s largest economy grew by an annualised rate of 1.9 per cent in this year’s second quarter, nearly double the 0.9 per cent recorded in the previous three months. However, it was still below analysts’ forecasts as fallout from the worst housing market since the Great Depression combined with increasing unemployment and rising oil prices to undercut the Government’s attempt to achieve an economic stimulus by sending $100 billion of tax rebates to US consumers.

Gloomy new employment data, released separately yesterday by the Labour Department, showed that the number of US workers filing new claims for unemployment benefits leapt to a near-five-year high last week, up 185,000 to 3.28 million – the highest level since December 2003.

Today’s July employment report is also expected to show a seventh successive month of job losses.

The various new reports pushed the S&P 500 index down 16.85 points to 1,267.40 at the close of New York trading. The Dow Jones was down 205.70 at 11,378.00.

Although the revised Commerce Department data puts the US economy into negative territory for the first time since the third quarter of 2001, it does not signal a recession. A recession is generally defined as two consecutive periods of quarter-on-quarter contraction in the economy.

However, economists gave warning that American business was nonetheless in a dire state. Lou Crandall, the chief economist of Wrightson Icap, the research firm, said: “The second-quarter figures may have been well up on the first quarter, but this is a clearing in the middle of the forest. The fact that this is all unfolding over a year or two, rather than two consecutive quarters, doesn’t make it any less painful.”

Brian Fabbri, BNP’s chief US economist, added: “There is no way we are out of a recession – that is still to come, probably in the fourth quarter of this year and the first quarter of next.”

Henry Paulson, the US Treasury Secretary, was more upbeat, arguing that the tax rebates had helped to boost the economy in the second quarter and would continue to stimulate spending for the rest of the year. Mr Paulson said he believed the US economy would continue to grow this year “although at a moderate pace”.

Alan Greenspan, the former Chairman of the Federal Reserve, yesterday predicted that US home prices are “nowhere near the bottom” and that the resulting financial turmoil was far from over.

Mr Greenspan’s odds on a recession remain at 50-50, but, either way, it will “take a while” for the markets to regain their stability, he said. However, in a speech to the Exchequer Club in Washington, he added: “While the stimulus is making our economy stronger than it would have been otherwise, the housing correction, credit market turmoil and high energy prices remain a considerable drag on the economy.”

Yesterday crude oil fell more than $2 a barrel – the biggest one-month decline since December 2004, as a slowing American economy caused fuel consumption to weaken to the lowest level in three years.

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