Belt tightening by consumers, businesses and the government figured into the fourth-quarter's slowdown.

GDP, which measures the value of all goods and services produced within the United States, is the best barometer of the economy's fitness.

Even with the feeble finish, the economy logged growth of 3.5 percent for all of 2005 — a year when the country coped with fallout from lofty energy prices and the devastating Gulf Coast hurricanes. Analysts called the GDP figure for all of 2005 solid, although it was down from 2004's 4.2 percent gain.

"Considering the impact of the hurricanes and record heating bills last year, the economy continues to show remarkable resilience," said Bill Cheney, chief economist at John Hancock Financial Services.

Looking at the fourth quarter, economists felt the slowdown was more of a temporary setback rather than a harbinger of a sustained period of economic troubles ahead.

"The economy hit a pothole in the fourth quarter. I'm not at all worried about the health of the economy," said Mark Zandi, chief economist at Moody's Economy.com.

Zandi believes the economy in the current January-to-March quarter is already doing better and predicts growth will come in around a 4 percent pace. For all of 2006, analysts project economic growth to top 3 percent.

On Wall Street, stocks surged on a fresh round of strong earnings reports. The Dow Jones industrials gained 97.74 points to close at 10,907.21.

President Bush, in his State of the Union address Tuesday evening, plans to spotlight some pocketbook issues, including high energy prices, tax cuts and expensive health care. Public concern about the economy is still relatively high, polls indicate.

The GDP report gave both Republicans and Democrats something to seize upon.

"We know the economy is not in real good shape. We have the price of oil, which is volatile, going up and down, up and down. We know that the deficit is staggering," said Senate Minority Leader Harry Reid, D-Nev.

Treasury Secretary John Snow countered that the "economic fundamentals point to continued strong economic performance in the United States in 2006." He called the fourth-quarter's weak showing "somewhat anomalous" and said he wouldn't read too much into it.

Consumers turned cautious in the final quarter as high energy prices and rising borrowing costs took a toll on their budgets. Their spending grew at a 1.1 percent pace, the slowest since the second quarter of 2001 when the economy was suffering through a recession.

Most of the weakness came as people sharply cut back on purchases of big-ticket "durable" goods, such as cars. This spending dropped by a hefty 17.5 percent rate, the sharpest decline since the first quarter of 1987.

Businesses also were more restrained, boosting spending on equipment and software at a 3.5 percent rate in the fourth quarter, the smallest since the first quarter of 2003.

Another factor restraining overall GDP in the fourth quarter: federal government spending, which fell at a 7 percent rate, the biggest drop since the third quarter of 2000. Analysts, skeptical about this decline, believed it would be reversed, especially given spending related planned for the war in Iraq and hurricane cleanup and rebuilding.

While growth slowed in the fourth quarter, inflation picked up, according to one price measure in the report that is closely watched by the Federal Reserve.

"Core" prices — excluding food and energy costs — rose at a 2.2 percent rate in the fourth quarter, up from a 1.4 percent growth rate in the third quarter. This suggests inflation is filtering into a variety of other prices.

To combat inflation, the Fed is expected to boost interest rates next Tuesday one-quarter percentage point to 4.50 percent.

It will be last meeting for Alan Greenspan, who will retire that day after more than 18 years at the helm of the central bank. Ben Bernanke, who is slated to succeed Greenspan, would lead his first meeting to consider interest rate policy on March 28. The Senate is expected to vote on Bernanke's nomination Tuesday.

"The new Fed chair will be tested right off the bat. The economy is slowing, though clearly not as rapidly as the headline number would have you think. ...At the same time, inflation is slowly accelerating," said Joel Naroff, president of Naroff Economic Advisors.

In a second report, the Commerce Department said new home sales in 2005 climbed to an all-time high, marking the fifth year in a row of record sales. Sales of new single-family homes totaled 1.28 million units last year, a 6.6 percent increase over 2004's sales.

The roaring housing market has helped to bolster the economy, but analysts expect the sector to lose steam this year. They're hoping the slowdown will be moderate. A big drop in home sales and house prices could pose dangers for the overall economy.

Exxon's profit for the year was also the largest annual reported net income in U.S. history, according to Howard Silverblatt, a stock market analyst for Standard & Poor's. He said the previous high was Exxon's $25.3 billion profit in 2004.

Exxon's results lifted the combined 2005 profits for the country's three largest integrated oil companies to more than $63 billion.

ConocoPhillips said last Wednesday that its fourth-quarter earnings rose 51 percent to $3.68 billion, while annual income climbed 66 percent to $13.53 billion. Two days later, Chevron Corp. said its fourth-quarter earnings rose 20 percent to $4.14 billion, while annual income jumped 6 percent to $14.1 billion.

The oil industry's stellar results renewed talk among some politicians for a windfall profit tax that would push companies to invest more in new production and refining capacity.

Sen. Babara Boxer, a California Democrat who sharply criticized oil executives appearing before Congress in November, struck again on Friday. She called on the Bush Administration and the Federal Trade Commission to "put an end to gouging," then suggested that FTC stood for "Friend to Chevron."

But John Felmy, chief economist for the American Petroleum Institute, a Washington-based trade group, said Monday that the political rhetoric was "not a case based on fact."

"We invested somewhere in the order of $86 billion last year," Felmy said. "Then we have to treat investors appropriately otherwise we'd have the Eliott Spitzers of the world coming after us."

The results for Exxon's latest quarter included a $390 million gain related to a litigation settlement. Excluding special items, earnings were $10.32 billion, or $1.65 per share. The result topped Wall Street's expectations. Analysts surveyed by Thomson Financial predicted earnings of $1.44 per share.

Exxon shares rose $1.87 to $63.16 in morning trade on the New York Stock Exchange.

Quarterly revenue ballooned to $99.66 billion from $83.37 billion a year ago but came in shy of the $100.72 billion Exxon posted in the third quarter, which was the first time a U.S. public company generated more than $100 billion in sales in a single quarter.

By segment, exploration and production earnings rose sharply to $7.04 billion, up $2.15 billion from the 2004 quarter, reflecting higher crude oil and natural gas prices. Production decreased by 1 percent due to the lingering effects of hurricanes Katrina and Rita, which battered the Gulf Coast in August and September.

The company's refining and marketing segment reported $2.39 billion in earnings, as higher refining and marketing margins helped offset the residual effects of the hurricanes.

Exxon's chemicals business saw earnings, excluding special items, decline by $413 million to $835 million, as higher materials costs squeezed margins.

For the full year, net income surged to $5.71 per share from $3.89 per share in 2004. Annual revenue grew to $371 billion from $298.04 billion.

To put that into perspective, Exxon's revenue for the year exceeded Saudi Arabia's estimated 2005 gross domestic product of $340.5 billion, according to statistics maintained by the Central Intelligence Agency.

The Commerce Department reported Monday that the savings rate fell into negative territory at minus 0.5 percent, meaning that Americans not only spent all of their after-tax income last year but had to dip into previous savings or increase borrowing.

The savings rate has been negative for an entire year only twice before _ in 1932 and 1933 _ two years when the country was struggling to cope with the Great Depression, a time of massive business failures and job layoffs.

With employment growth strong now, analysts said that different factors are at play. Americans feel they can spend more, given that the value of their homes, the biggest asset for most families, has been rising sharply in recent years.

But analysts cautioned that this behavior was risky at a time when 78 million Americans are on the verge of retirement.

"Americans seem to have the feeling that it is wimpish to save," said David Wyss, chief economist at Standard & Poor's in New York. "The idea is to put away money for old age and we are just not doing that."

The Commerce report said that consumer spending for December rose by 0.9 percent, more than double the 0.4 percent increase in incomes last month.

A price gauge that excludes food and energy rose by a tiny 0.1 percent in December, down from a 0.2 percent rise in November. This inflation index linked to consumer spending is closely watched by officials at the Federal Reserve.

The central bank meets on Tuesday, when it is expected it will boost interest rates for a 14th time. However, many economists believe those rate hikes are drawing to a close with perhaps another quarter-point hike at the March 28 meeting as the central bank is starting to see the impact of the previous rate hikes in a slowing economy.

The government reported on Friday that overall economic growth slowed to a 1.1 percent rate in the final three months of the year, the most sluggish pace in three years.

That slowdown was heavily influenced by a big drop for the quarter in spending on new cars, which had surged in the summer as automakers offered attractive sales incentives.

A negative savings rate means that Americans spent all their disposable income, the amount left over after paying taxes, and dipped into their past savings to finance their purchases. For the month, the savings rate fell to 0.7 percent, the largest one-month decline since a 3.4 percent drop in August.

The 0.5 percent negative savings rate for 2005 followed a 1.8 percent rate of savings in 2004. The last negative rates occurred in 1932, a drop of 0.9 percent, and a record 1.5 percent decline in 1933. In those years Americans exhausted their savings to try to meet expenses in the wake of the worst economic crisis in U.S. history.

One major reason that consumers felt confident in spending all of their disposable incomes and dipping into savings last year was that a booming housing market made them feel more wealthy. As their home prices surged at double-digit rates, that created what economists call a "wealth effect" that supported greater spending.

The concern, however, is that the housing boom of the past five years is beginning to quiet down with the rise in mortgage rates. Analysts are closing watching to see whether consumer spending, which accounts for two-thirds of total economic activity, falters in 2006 as Americans, already carrying heavy debt loads, don't feel as wealthy as the price appreciation of their homes would seem to indicate.

For December, the 0.4 percent rise in incomes was in line with Wall Street expectations. It followed a similar 0.4 percent increase in November, with both months lower than the 0.6 percent rise in October.

The 0.9 percent rise in spending with slightly above the expectation for a 0.8 percent increase and was almost double the 0.5 percent increase in November.

The International Atomic Energy Agency meets on Thursday to decide whether to refer Iran to the United Nations Security Council. Mahmoud Ahmadinejad, Iran's president, has threatened to respond to any punitive action by cutting off the 2.6 million barrels of oil a day it pumps into the markets - 5 per cent of the world's supply.

Jittery investors sent the price of Brent crude to $67.76 a barrel in New York on Friday night, as fears about the Iranian crisis and rebel attacks on oil facilities in Nigeria rocked confidence in an already tight market.

Kona Haque, commodities editor at the Economist Intelligence Unit, said the worst case scenario of a shutdown of supplies from Iran would be 'absolutely devastating ... I wouldn't be surprised to see the price go over $90 a barrel'. She said fears about Iran are already adding a $10 risk premium to oil prices, which could remain in place for months as the crisis escalates. Davoud Danesh-Jafari, Iran's oil minister, has warned that the result of punitive action against his country would be 'the unleashing of a crisis in the oil sector'.

'The resumption of nuclear research by Iran is currently the market's largest preoccupation,' said BNP Paribas oil analyst Eoin O'Callaghan. He has pushed up his forecast for average oil prices this year to $65 a barrel because of geopolitical risk. He points out that the oil price rose more than 60 per cent in the run-up to the Iraq war; a similar increase now would take prices to $94.

Haque said that with little spare capacity in the market, prices are much more vulnerable to political shocks: 'We need a lot more supply capacity to have a cushion; it's going to take another couple of years until that happens.'

The oil producers' organisation Opec meets in Vienna on Tuesday amid calls from some members, including Iran, to cut back production and push up prices further. But most analysts believe production quotas will be left unchanged. 'There's no pressure on Opec to do anything,' said Rob Laughlin, oil analyst at Man Financial.

He said the Nigerian situation could potentially be worse for oil prices than fears about a supply squeeze from Iran. Production levels in Nigeria have already been lowered by 200,000 barrels a day in an effort to protect facilities from the rebels, who have deliberately targeted foreign oil companies. 'Nigeria is probably as big a problem as Iran for us. We're pretty politically squeezed, between the Nigerian rebels and the Iranian president,' said Laughlin.

The president of Opec, Nigeria's Edmund Daukoru, fuelled market fears on Friday when he told Reuters that his organisation was unlikely to step in with extra supplies if the Iranian crisis worsened. 'If Iran decides to stop production, or is forced to stop production because of a sanction, I don't think Opec necessarily has a role to play there,' he said.

Crude peaked at just over $70 a barrel last autumn after hurricane Katrina, but demand from fast-growing economies such as China and India, together with supply shortages in a number of producing countries, has prevented prices from dropping much below $60.

Investment in Russian oil production has been weak since President Putin's tax raid on the oil giant Yukos, and Iraqi output is well below the levels Washington hoped for before coalition tanks rolled into Baghdad. A cold snap in the US, which has so far had an unusually warm winter, could push prices up further in the weeks ahead. 'Should cold weather return to the US, then we'll really be in trouble,' said Laughlin.

But it has drawn warnings from foreign policy specialists inside and outside the government, who say it could lead to growth of a separate military assistance effort not subject to the same constraints applied to foreign aid programs that are administered by the State Department. Such constraints are meant to ensure that aid recipients meet certain standards, including respect for human rights and protection of legitimate civilian authorities.

"It's important that diplomats remain the ones to make the decisions about U.S. foreign assistance," said George Withers, a senior fellow at the Washington Office on Latin America and a former staff member on the House Armed Services Committee. "They can ensure such decisions are taken in the broader context of U.S. foreign policy."

Many lawmakers, too, were initially cool to Rumsfeld's request. The Armed Services committees in both the House and Senate declined to write the provision into their original defense authorization bills, citing concerns about a lack of jurisdiction and an absence of detail about where the money would be spent.

But the Pentagon pressed its case, with senior commanders joining top officials in weighing in with reluctant members.

"This was the most heavily lobbied we've been by the Pentagon in the several years I've been here," said one Senate staff member. "They really, really wanted this."

Secretary of State Condoleezza Rice also threw her support behind the measure, overruling lower-ranking staff members who had argued that existing laws were sufficient and who had cautioned against granting the Pentagon such flexibility, department officials said. She joined Rumsfeld last summer in a letter to Congress urging passage of the legislation.

The initiative addresses an issue that both the Pentagon and the State Department have identified as crucial in fighting terrorism and bolstering stability abroad -- namely, "building partnership capacity" in Africa and other developing regions.

Administration officials complain that attempts to provide such security assistance, especially in crisis situations, have often been hampered by a patchwork of legal restrictions and by a division of responsibilities among U.S. government departments. Improving security in a failing foreign nation, for instance, might involve drawing on the Pentagon for military training, the State Department for police training, the Department of Homeland Security for border protection and the Treasury Department for financial enforcement. Cobbling such pieces together can take many months, officials say.

After striking out with the Armed Services committees, Pentagon officials found an ally in Sen. James M. Inhofe (R-Okla.), who has a particular interest in Africa. Inhofe agreed to propose the new authority on the Senate floor as an amendment to the Defense Authorization Act. To ensure compliance with existing foreign aid rules, language was included saying that funds for the missions would be transferred from the Pentagon to the State Department before being expended and would be subject to limitations of the Foreign Assistance Act.

These conditions were dropped in a later Senate-House conference. But other conditions were added still reflecting congressional reservations.

The final version -- Section 1206 of the authorization act -- says the Pentagon can provide training, equipment and supplies "to build the capacity" of foreign militaries to conduct counterterrorist operations or join with U.S. forces in stability operations. But the section also stipulates that orders for such aid must originate with the president, and it requires the Pentagon to work closely with the State Department in formulating and implementing the assistance.

This new authority cannot be used to provide any assistance banned by other U.S. laws, the provision adds. Further, the measure grants less money than initially requested -- $200 million instead of $750 million. And it expires after two years, far short of the open-ended mandate that Rumsfeld had sought.

"We're calling it a pilot program," said Sen. John W. Warner (R-Va.), chairman of the Armed Services Committee. "But I think it'll prove its worth."

Defense officials say they are pleased with the outcome. "It's a very good start," said Jeffrey Nadaner, deputy assistant secretary of defense for stability operations. "For the Congress, which hasn't done this before, we think it's a bold, cooperative move."

Reaction at the upper levels of the State Department also has been positive. Under a separate provision approved with the train-and-equip measure, the department is getting $200 million from the Pentagon to bolster a new Reconstruction and Stabilization Office for coordinating civilian assistance. This provision stirred its own controversy among lawmakers, who as a matter of principle have opposed shifting Pentagon funds to the State Department.

Having gained this much, the Pentagon and State Department are now setting their sights on a more ambitious overhaul of foreign assistance rules.

"In the longer run, we need to have our assistance structured in a way that will give us even broader flexibility," said Philip Zelikow, the State Department's counselor. "The president and his advisers must be able to devise a program that can allocate money as needed among whatever agencies have the skill sets to deliver the capabilities, whether State, Defense, Justice or other government agencies."

n a groundbreaking move, the UN Development Programme (UNDP) has drawn up a visionary proposal that has been endorsed by a range of figures including Gordon Brown, the Chancellor of the Exchequer, and Joseph Stiglitz, the Nobel Laureate.

It says an unprecedented outbreak of co-operation between countries, applied through six specific financial tools, would slice through the Gordian knot of problems that have bedevilled the world for most of the last century.

If its recommendations are accepted - and the authors acknowledge this could take years or even decades - it could finally force countries to face up to the fact that their public finance and growth figures conceal the vast damage their economies do to the environment.

At the heart of the proposal, unveiled at a gathering of world business leaders at the Swiss ski resort of Davos, is a push to get countries to account for the cost of failed policies, and use the money saved "up front" to avert crises before they hit. Top of the list is a challenge to the United States to join an international pollution permit trading system which, the UN claims, could deliver $3.64trn of global wealth.

Inge Kaul, a special adviser at the UNDP, said: "The way we run our economies today is vastly expensive and inefficient because we don't manage risk well and we don't prevent crises." She downplayed concerns over up-front costs and interest payments for the new-fangled financial devices. "The gains in terms of development would outweigh those costs. Money is wasted because we dribble aid, and the costs of not solving the problems are much, much higher than what we would have to pay for getting the financial markets to lend the money."

The UNDP is determined to ensure globalisation, which has generated vast wealth for multinational companies, benefits the poorest in society.

It urges politicians to embrace some groundbreaking schemes put in place in the past 12 months to tackle global warning, poverty and disease, based on working with the global markets to share out the risk.

These include a pilot international finance facility (IFF) to "front load" $4bn of cash for vaccines by borrowing money against pledges of future government aid.

The scheme, which is backed by the UK, France, Italy, Spain, Sweden and the Bill and Melinda Gates Foundation, was born out of a proposal by Gordon Brown for a larger scheme to double the total aid budget to $100bn a year.

In an endorsement of the report, Mr Brown said: "This shows how we can equip people and countries for a new global economy that combined greater prosperity and fairness both within and across nations."

The UNDP says rich countries should build on this and go further. It proposes six schemes to harness the power of the markets:

* Reducing greenhouse gas emissions through pollution permit trading; net gain $3.64trn.

* Cutting poor countries' borrowing costs by securing the debts against the income from stable parts of their economies; net gain $2.90trn.

* Reducing government debt costs by linking payments to the country's economic output; net gain $600bn.

* An enlarged version of the vaccine scheme; net gain (including benefits of lower mortality) $47bn.

* Using the vast flow of money from migrants back to their home country to guarantee; net gain $31bn.

* Aid agencies underwriting loans to market investors to lower interest rates; net gain $22bn.

Professor Stiglitz, the former chief economist of the World Bank and a staunch critic of the way globalisation harms the poor, said: "Globalisation has meant the closer integration of countries, and that in turn has meant a greater need for collective action.

"One of the most important areas of failure is the environment. Without government intervention, firms and households have no incentive to limit their pollution." He said a global public finance system would force countries to acknowledge the external damage their policies had, "the most important being global climate change".

Solving the environmental crisis tops the UN's $7trn wish-list. It calls for an international market to trade pollution permits that would encourage rich countries to cut pollution and hit their targets under the Kyoto protocol.

But - and the UN admits it is a big "but" - the US would have to sign up to Kyoto and carbon trading to achieve the $3.64trn that it believes the system would deliver over time.

"We are dealing with a global problem as pollution can only be dealt with internationally," Ms Kaul said. Richard Sandor, the head of the Chicago Climate Exchange, added: "Many encouraging signs are emerging. When the business case is clear, private entrepreneurs step forward."

But, the proposal is unlikely to get support from some green groups who believe that action to curb consumption, rather than market incentives, are the way to reduce carbon emissions.

Andrew Simms, director of the New Economics Foundation, said it left unanswered questions over how these markets would be managed and how the benefits and costs would be distributed. "We have nothing against markets so it would be missing the point to get into a pro- or anti-market stance. The point is how you distribute the benefits."

He said the Nineties, the zenith decade for globalisation, had seen just 60 cents out of every $100 worth of growth reach the poorest in society, compared with the $2.20 in the Eighties.

He said a pollution trading regime had the potential to deliver "enormous" benefits to poor countries, but said the UN report failed to show a detailed plan.

"Our view is that you have to cap pollution, allocate permits and then you can trade. But it depends on how it is set up. Because you are dealing with a global commons of the atmosphere, the danger is that you could be effectively dealing in stolen goods."

He said a system set up now to trade in pollution permits could end up permanently depriving poor countries that joined the system further down the road.

International problems - and solutions

PANDEMIC DISEASES

Millions of people across the developing world have died from malaria, tuberculosis and HIV/Aids, as well as from other pandemics. Vaccines needed to avert them require much-needed investment.

SOLUTION: An advance commitment by rich countries to buy $3bn (£1.7bn) worth of vaccines would be enough to encourage pharmaceutical giants to invest in finding medicines that would eliminate these pandemics.

SAVING: $600bn

ALTERNATIVE SOLUTION: Vaccines are needed but more should be done in the meantime. Extra aid is needed for simple tools such as mosquito nets that would curb spread of malaria.

PARIAH STATES

Big business and global money ignore countries where they see the risk of conflict outweighing their potential profit margins.

SOLUTION: Guarantees by international organisations such as the International Monetary Fund to lower the cost of borrowing for poor nations by underwriting investors' loans to conflict-torn states.

SAVING: $22bn

ALTERNATIVE SOLUTION: Sometimes large volumes of cash are needed and this is one. Live8 showed there was huge support among taxpayers for higher aid to countries in distress.

Hitting a commitment made in the 1960s of 0.7 per cent of GDP would unlock $140bn a year.

NATIONAL BANKRUPTCY

Once great nations such as Brazil and Argentina were reduced to the status of beggars after poor economic policy combined with debts with national and international lenders.

SOLUTION: A system to enable countries to take loans linked to their average economic growth rate to ensure that they do not have to cut public spending to raise the money to borrow needed funds during the hard times.

SAVING: $600bn

ALTERNATIVE SOLUTION: A system to allow countries to seek protection from their creditors in the same way that US companies can take so-called Chapter 11 bankruptcy.

SPECULATIVE INVESTORS

Poor countries suffer most from swings in investment tastes by the big global investors that means money can leave as soon as it arrives.

SOLUTION: Enable countries to buy "insurance policies" against big swings in growth that would ensure that they did not have to cut public spending every time. In 1997 it wreaked havoc across South-east Asia.

SAVING: $2,900bn

ALTERNATIVE SOLUTION: Curb speculative investment by imposing a tax on foreign exchange transactions aimed at destabilising a currency. It could directly raise funds for development while preventing the worst excesses of the markets.

GLOBAL WARMING

Scientists believe human activity has led to climate change and disappearing Arctic ice. The world's poor also have to live with lethal storms and floods.

UN SOLUTION: A system of international trading in permits to allow pollution that would encourage countries to cut their emission of greenhouse gases so they can sell their "right to pollute" to other states. UNDP says it is more effective than just setting targets.

SAVING: $3,620bn

ALTERNATIVE SOLUTION: An international approach is needed but one that prevents people from causing harm by setting pollution targets rather than trying to bribe them not to. Also agree global airline tax.

BRAIN DRAIN

Millions of skilled workers leave their home countries every year in search of a better life in the West. In some states nine out 10 professionals have left.

SOLUTION: Enable countries to borrow on the open markets against the money workers send home. The capital would be used to invest in the country to build infrastructure that would discourage people from leaving.

SAVING: $31bn

ALTERNATIVE SOLUTION: An international code of ethical guidelines overseen by bodies such as the World Health Organisation (for doctors and nurses) to monitor the harm that migration of professionals causes.