Just days after his inauguration for a second term as president, George Bush must confront a slowdown in the growth of the American economy, a deteriorating trade performance and increasing inflation.

Official US data published today showed third-quarter GDP growth had fallen to 3.1 per cent, down 0.9 per cent on the previous three months and the slowest rate since the beginning of 2003. The news sent the dollar falling on foreign exchange markets.

"Net exports subtracted 1.7 per cent from GDP in the fourth quarter, much bigger than we had expected," Elisabeth Denison, an economist at Dresdner Klienwort Wasserstein, told Reuters. "It’s a pattern that is worrying especially with the big imbalances we are seeing in the current account.

"We are importing more foreign goods and not exporting as much. This doesn’t bode well for hopes that the current account will strengthen in 2005."

Despite the softer fourth quarter, GDP for the year advanced 4.4 per cent, up from 3 per cent in 2003 and the best performance since 1999.

The growth of consumer spending in the fourth quarter also fell back slightly- down 0.5 per cent to a 4.6 percent annual rate. For all of 2004, consumer spending rose by 3.8 per cent, the strongest showing since 2000.

Inflation data released with the GDP figures also showed a worrying trend. Personal consumption expenditures minus food and energy costs, the favoured measure of Federal Reserve Chairman Alan Greenspan, climbed at a 1.6 per cent annual rate in the fourth quarter- nearly twice the 0.9 per cent advance posted in the previous three months.

The higher prices have confirmed expectations that the Federal Reserve, which meets next week, will announce that it is raising American interest rates by a quarter percentage point, the sixth increase since June.

The latest snapshot of the economy comes as President Bush tries to build political and public support for two key pieces of his second-term economic agenda: overhauling the Social Security pension system and the nation’s tax code.

Analysts expect the American economy to expand at a pace of around 3.5 per cent in 2005.

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