Sept. 6 (Bloomberg) -- Most of the U.S. economy grew more than forecast last month, confirming the Federal Reserve's view that the pain of the credit-market rout is ``limited,'' a private report showed.

The Institute for Supply Management's index of non- manufacturing businesses held at 55.8, the Tempe, Arizona-based group said today. The Labor Department said separately that productivity rose more than previously estimated in the second quarter, while claims for jobless benefits declined last week.

The ISM report showed expansion among retailers, restaurants, healthcare companies and other service businesses that together make up 80 percent of the U.S. economy. It contrasts with figures from the Mortgage Bankers Association, which said the number of Americans who may lose their homes to foreclosure reached a record.

``It appears the contagion that's affecting housing hasn't spilled over into other areas of the service sector yet,'' said Sam Bullard, an economist at Wachovia Corp. in Charlotte, North Carolina. ``The labor market is slowing, but it's not super weak either.''

Bullard had the second most-accurate forecast among 76 economists surveyed by Bloomberg News. The median was for a drop to 54.5. Estimates ranged from 52 to 58.2. The gauge of new orders rose to 57 from 52.8, the biggest jump in 11 months.

Wal-Mart, Macy's

Retailers benefited from back-to-school shopping, the industry's second-biggest sales period after the December holidays, according to figures today from the International Council of Shopping Centers. Wal-Mart Stores Inc., Macy's Inc. and retailers catering to teenagers reported August purchases that topped analysts' estimates.

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. Last week, Chairman Ben S. Bernanke pledged to do what's needed to prevent higher credit costs from bringing the six-year expansion to an end.

Atlanta Fed President Dennis Lockhart today said he hasn't seen ``conclusive'' signs of a housing spillover into the broader economy and warned that inflation has yet to be contained. St. Louis Fed President William Poole said it's not clear yet that the economy will ``nosedive'' and he's not sure of the right response to housing and financial turmoil.

The yield on the benchmark 10-year note was 4.50 percent at 3:54 p.m. in New York, up from 4.47 percent late yesterday. The Standard & Poor's 500 Index rose 0.4 percent to 1478.26.

Productivity Increases

Productivity, a measure of employee efficiency, rose at an annual rate of 2.6 percent, the most in almost two years and up from a previous estimate of 1.8 percent, the Labor Department said today in Washington. Wage and benefit expenses climbed at a 1.4 percent pace, less than reported last month.

Fed officials at their last scheduled meeting expressed concern about slowing productivity, and today's figures indicate pressures on inflation may be less than previously estimated.

Economists estimated productivity, a measure of how much an employee produces for each hour of work, rose at a 2.4 percent pace in the second quarter, according to the median of 73 forecasts in a Bloomberg News survey.

In a separate report, the Labor Department said initial claims for unemployment benefits fell by 19,000 to 318,000 in the week that ended Sept. 1. The department also said the total number of Americans receiving unemployment benefits rose to 2.598 million in the week ended Aug. 25, the highest since February, suggesting hiring has softened.

Employment Measure

The ISM's index of employment for non-manufacturing industries fell to 47.9, the worst reading since December 2002, from 51.7 in July. A measure of prices paid fell to 58.6, the lowest since February, from 61.3.

Mortgage companies and some banks are shutting operations as lending 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.

Today Lehman Brothers said it will cut 850 more jobs because of reductions in the size of its mortgage operations in the U.S. and overseas.

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 18:30 EDT