The U.S. economy hit the brakes hard in the fourth quarter, growing at an annualized rate of just 0.6 per cent, the U.S. Commerce Department said Wednesday.

The fourth-quarter growth was half the pace that economists had been predicting.

The October-December period was also a marked downturn from the 4.9 per cent annualized growth seen in the third quarter.

For all of 2007, the U.S. economy expanded by 2.2 per cent, which was its weakest performance since 2002, when the country was getting over a 2001 recession.

Extreme weakness in the housing sector was the main reason for the economic slowdown in 2007. Builders cut their spending on house projects by 16.9 per cent last year, the biggest drop in 25 years.

The U.S. Federal Reserve reduced a key interest rate by 0.75 of a percentage point last week, and many economists expect the Fed to reduce its federal funds rate by another 0.5 of a percentage point on Wednesday.

Consumer spending, which is a key to economic activity, slowed to a two per cent annual pace in the fourth quarter, down from 2.8 per cent in the previous quarter.

Businesses also responded by shaving their inventories of goods, which trimmed 1.25 percentage points from fourth-quarter gross domestic product.

"The U.S. economy fired on just two cylinders late last year (business investment and exports), both of which are likely to downshift just when the consumer faces brisk headwinds," said BMO Capital Markets economist Sal Guatieri in a commentary.

"Looking ahead, we expect consumer spending to slow further in the first quarter of 2008, reflecting softer labour markets, elevated energy prices and declining house prices," said RBC economist Rishi Sondhi.

"On the corporate side, we also expect some weakening in business investment, owing to the effects of the financial market deterioration," Sondhi added.