The American economy almost ground to a standstill in the first three months of the year as a healthy rise in consumer spending was wiped out by an unexpected cut in the amount of stocks held by business.

Statisticians put growth in output at an annualised 0.6 per cent, equivalent to barely 0.15 per cent over the three months. This is closer to stagnation than at any time since the final quarter of 2002, when the US was emerging from its postbubble recession.

It indicates a big loss of momentum from the 2.5 per cent rate of growth recorded for the final quarter of last year.

A month ago the US Commerce Department estimated that output had expanded at an annual rate of 1.3 per cent. Subsquent detailed numbers led economists to expect some downward revision. Markets reacted calmly, even though the downgrade was steeper than most had expected.

The original estimate included a $3.7 billion (£1.9 billion) rise in stocks of materials and finished goods held by business. Stocks are now said to have fallen by $1.1 billion, indicating that business was reacting to pressure on consumers from the fall in house prices and higher mortgage interest payments.

In the event, consumer spending, the biggest element in the economy, rose at a healthy annual rate of 4.4 per cent, more than first estimated. Instead of being used to buy homes, however, much of this spending drained into imports, which rose at an annual rate of 5.7 per cent, also more than first thought.

Traders chose to put more weight on the 2.2 per cent reading of core consumer prices inflation, one measure that was not revised. The Federal Reserve likes core inflation to remain between 1 per cent and 2 per cent, so a cut in official interest rates was rated less likely.

In the minutes of its most recent meeting, the Fed’s rate-setting committee acknowledged that the bigger danger to growth forecasts was on the downside but said that the risks had diminished and made clear that it was still anxious about inflation. The OECD, in its critical recent report on the US economy, also counselled against any hasty changes in the Fed’s official rates.

Wall Street economists are remarkably sanguine about US economic prospects. So is the OECD, which only last week forecast that the US would enjoy a “soft landing” with economic output expanding by 2.1 per cent this year and slightly more next year.

There have been more recent signs that housing problems could be past their worst, even though spending on new homes fell by 4 per cent in three months. Interest rates have stopped rising and excess stocks of new homes have been sold off.

Typical of this optimistic approach, Kurt Karl, of Swiss Re, said: “It is probably going to make good news for the current quarter, because once you draw down inventories, it is harder to draw them down again.”

The National Association for Business Economics predicts 2.3 per cent annual growth in the second quarter.

In a still-buoyant bull market, traders already are looking to employment numbers that will be released today as a more accurate reading of the economy’s pulse.

Budget bonus

America’s budget deficit, once seen as threatening stability, could now shrink to as little as $200 billion this year, making it proportionately smaller than Britain’s. In February President Bush projected a $240 billion deficit for the 2007 fiscal year but Bob Portman, the White House budget director, said that buoyant tax revenue should now make it lower. This is well ahead of the deficit reduction schedule set at the time of Mr Bush’s postbubble tax cuts, then seen as unrealistic. This week the OECD called on members to use buoyant taxes to cut deficits, not to spend more.

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