Sept. 6 (Bloomberg) -- U.S. service industries expanded at a faster pace than forecast in August, easing concern that financial market turmoil and the collapse in subprime mortgages will cause the expansion to stall.

The Institute for Supply Management's index of non- manufacturing businesses, including banks, builders and retailers held at 55.8 for a second month, the Tempe, Arizona-based group said today. Readings above 50 point to growth.

The expansion in services, which make up almost 90 percent of the economy, suggests the effects of the mortgage crisis and a jump in borrowing costs have been slow to spread outside of real estate. The figures may help assuage concerns among Federal Reserve policy makers about the economy's growth prospects.

``It's still early, but the indications are that for all the slowdowns we're seeing in financial markets and real estate, we're getting good compensating growth in other industries,'' Peter Kretzmer, a senior economist at Banc of America Securities LLC in New York, said before the report. ``For the Fed, there may be a presumption that more weakness may be coming, but for now I think the economy is showing a lot of resilience.''

Economists expected the ISM's non-manufacturing gauge to fall to 54.5, according to the median of 76 forecasts in a Bloomberg News survey. Estimates ranged from 52 to 58.2.

The gauge of new orders rose to 57 from 52.8, the biggest jump in 11 months. A measure of prices paid fell to 58.6, the lowest since February, from 61.3.

Inventories Rise

The Institute's measure of inventories for non-manufacturing companies rose to 57 from 55. The group's index of backlogs for non-manufacturing industries fell to 50 from 53 in July.

The ISM's index of employment for non-manufacturing industries fell to 47.9, the lowest since December 2002, from 51.7 in July.

The Fed said yesterday in its regional business survey that ``reports that the turmoil in financial markets had affected economic activity during the survey period were limited'' outside of real estate. ``Economic activity has continued to expand'' nationwide, the Fed said in the Beige Book report, which covered a period up to Aug. 27.

Personal spending in the U.S. increased more than economists forecast in July, the Commerce Department said Aug. 31, showing economy was expanding at the start of the third quarter before credit markets deteriorated.

Fed Assessment

Still, credit restrictions and a drop in financial markets ``appreciably'' increased the risks to economic growth, the Fed said Aug. 17 when it lowered the rate at which it lends to banks.

``Further tightening of credit conditions, if sustained, would increase the risk that the current weakness in housing could be deeper or more prolonged than previously expected,'' Fed Chairman Ben S. Bernanke said last week at the Kansas City Fed's annual symposium in Jackson Hole, Wyoming. Bernanke said the central bank will ``act as needed to limit the adverse effects on the broader economy.''

Mortgage companies and some banks are shutting operations as the mortgage market dries up.

First American Corp., the largest U.S. title insurer, this week said it would eliminate 1,300 jobs. That is about 3 percent of the Santa Ana, California-based company's workforce. Lehman Brothers Holdings Inc., the biggest underwriter of U.S. bonds backed by mortgages, in August closed its subprime-lending unit and said 1,200 employees would lose their jobs.

The increase in layoffs fuels concern over the outlook for second-half growth. Companies in the U.S. added the fewest jobs in August since June 2003, ADP Employer Services said yesterday.

The Organization for Economic Cooperation and Development said financial-market turbulence has curbed prospects for the global economy. The Paris-based organization lowered forecasts for growth in the U.S. and 13-nation euro region this year and said a rate cut by the Fed was ``warranted.''

``Downside risks have become more ominous,'' Jean-Philippe Cotis, the OECD's chief economist, said in a statement released in Paris yesterday.

Manufacturing in the U.S. expanded at the slowest pace in five months in August as companies reduced orders after borrowing costs climbed, according to a Sept. 4 report from the Institute for Supply Management.

To contact the reporter on this story: Joe Richter in Washington Jrichter1@bloomberg.net.

Last Updated: September 6, 2007 10:20 EDT