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More signs of slowing US economy US Fed issues inflation warning
(about 3 hours later)
Growth in the US services sector has slowed, a further sign that growth in the world's biggest economy is slowing. Federal Reserve chairman Ben Bernanke has warned that inflation is still too high in the US.
The non-manufacturing index from the Institute for Supply Management (ISM) fell to its lowest level since April 2003, albeit still indicating growth. Inflation is "above what we would consider price stability", he told the Washington-based Economics Club.
The services sector covers everything from shops and restaurants to airlines and banks, and accounts for 80% of US economic activity. However Mr Bernanke gave no indication whether interest rates would be raised further. A housing market correction would continue to dent growth, he said.
Figures released earlier on Wednesday highlighted a slowdown in the services sector, a driver behind the economy.
'Watching carefully'
In his address to the club focusing on long-term trends in the US economy, Mr Bernanke warned that entitlement schemes - including Medicare and Social Security - needed to be significantly overhauled.
Such programmes were underfunded - and if not reformed - could create a significant fiscal burdens for future generations.
We have to watch [inflation] very carefully to make sure it does not rise or even remain where it is Ben Bernanke, Fed chairman
In answering questions after the speech, the Fed chairman said the current housing slowdown could wipe around one percentage point US growth in the second half of 2006.
However he added that inflation remained a concern: "It is something we have to watch very carefully to make sure it does not rise or even remain where it is."
After raising interest rates 17 times in a row, by a quarter of a percentage point, the Fed decided in August to keep it steady at 5.25%.
Some analysts now feel signs of a slowing economy means the Fed will pause before raising rates again.
US growth has slowed to 2.6% a year, from 5.6% in the first quarter of 2006.US growth has slowed to 2.6% a year, from 5.6% in the first quarter of 2006.
News of the slackening-off in services came as the US government unveiled data for September factory orders which showed no change from the month before. 'Losing momentum'
Such evidence of slower growth was evident in figures released Wednesday from the Institute for Supply Management (ISM), which saw its non-manufacturing index fall to its lowest level since April 2003, albeit still indicating growth.
The services sector covers everything from shops and restaurants to airlines and banks, and accounts for 80% of US economic activity.
News of the slackening-off in services came as the US government unveiled data for August factory orders which showed no change from the month before.
The ISM's manufacturing index had earlier in the week indicated slowing growth in the manufacturing sector.The ISM's manufacturing index had earlier in the week indicated slowing growth in the manufacturing sector.
With the housing market - a key driver for US consumer spending and manufacturing - in the doldrums, many economists believe the Federal Reserve could now choose to keep interest rates on hold.
"This tells us what we already knew about the economy - at least the services side - that generally it is losing momentum as we move into the fourth quarter," said Hugh Johnson, chief investment officer with Johnson Ellington Advisors."This tells us what we already knew about the economy - at least the services side - that generally it is losing momentum as we move into the fourth quarter," said Hugh Johnson, chief investment officer with Johnson Ellington Advisors.
Investors will be keenly watching to see what Federal Reserve Chairman Ben Bernanke will say later on Wednesday at the Economic Club of Washington.
After consecutively raising interest rates 17 consecutive times, by one quarter of a percentage point to 5.25%, the Fed decided in August to keep rates steady.