The likelihood of yet another rate cut by the US Federal Reserve was increased yesterday with the news that the government had badly underestimated the extent of the slowdown in the US economy in the third quarter.

The economy contracted by 1.1 per cent in the July-September period, the Commerce Department said, not by the 0.4 per cent earlier stated.

This is the biggest contraction in gross domestic product (GDP) in a decade - economic output shrank 2 per cent in the first quarter of 1991 in the midst of the last recession - and comes mainly as a result of businesses cutting deeply into inventories rather than manufacturing new products.

The markets are now factoring in the near-certainty of a further cut in short-term lending rates when the Federal Reserve policy-making committee meets again on December 11th, according to Mr Robin Griffiths, chief technical analyst of Hong Kong Shanghai Bank in New York.

Various Fed governors had been saying "we're not out of the woods yet, we may have to cut rates again," he said. "The markets expect to bottom out in March or April in 2002 and then rebound...I think we come out of recession but we do not go boom until possibly as late as October."

Mr Jim Glassman, senior economist at JP Morgan Chase, said, "we're looking for a rebound sometime in the spring", and predicted that the Fed would cut rates in December and again in January by which time it would feel "pretty comfortable" with its policy.

After 11 cuts this year, the short-term lending rate in the US is now 2.0 per cent, compared with the 3.25 rate set by the European Central Bank. Most economists predicted yesterday's revised GDP figure would show contraction at 1.0 per cent so the Commerce Department statement did not come as a shock on Wall Street.

Inventories fell by $60 billion, (€55.95 billion) the Department said, not $50 billion as earlier estimated. The drop in inventory value has an upside: over-stocked inventories have been one of the main reasons for the slowdown in industrial production.