updated 10/4/2006 6:05:33 PM ET 2006-10-04T22:05:33

In further signs of a sluggish economy, orders to factories for manufactured goods were weak for a second consecutive month and service sector activity had its worst performance in more than three years.

Major Market Indices

New orders for manufactured goods stayed basically the same in August at $403.6 billion, on the heels of 1 percent plunge in demand in July, the Commerce Department reported Wednesday. The August report showed big declines in demand for computers and commercial aircraft.

Also, a gauge of activity in the service sector, where most people work, fell sharply in September to 52.9, down from 57.0 a month before, according to the Institute for Supply Management. It was the poorest from the showing since April 2003 and was far below expectations.

Both reports supported the view that the economy is continuing to slow under the impact of weaker consumer spending and a cooling housing market.

On Wall Street, investors saw the lackluster economic news as further evidence that a slowing economy will keep inflation pressures at bay.

The Dow Jones industrial averaged soared 123.27 points to close at 11,850.61. It was the second consecutive record close for the Dow, which had taken nearly seven years to surpass the old mark from January 2000.

Many economists believe that growth in the just-completed July-through-September period will not match the spring’s pace of 2.6 percent growth. That performance compared with the sizzling 5.6 percent growth from January through March.

Brian Bethune, an economist at Global Insight, said the economy probably grew at a rate just under 2 percent from July through September, but would rebound to about 2.5 percent over the final three months of the years.

Many analysts believe that recent declines in gasoline and other energy products will help to lift consumers’ spirits during the Christmas shopping season and prevent the economy from tumbling into a recession.

The economic slowdown is expected to reduce pressures on inflation and not force the Federal Reserve’s hand in again pushing rates higher this year.

Federal Reserve Chairman Ben Bernanke said Wednesday that a “substantial correction” was under way in the housing sector which he estimated would shave about a percentage point from growth in the second half of this year.

Bernanke said the drag from housing would be partially offset by other factors, such as solid job creation and income growth.

“How far will this correction go? It is very difficult to tell, is the honest answer,” Bernanke said in response to a question after a speech to the Washington Economic Club.

While the service index posted a big decline in September, economists were encouraged that a part of the index that measures inflationary concerns improved markedly last month.

“As far as the services sector is concerned, the price-pressure genie has disappeared back into the bottle,” Bethune said.

Real estate and construction, hurt by this year’s housing slowdown, reported declining activity in September; retailing showed strength.

The level pace for factory orders in August was in line with expectations. But the government revised the July performance — from an estimated decline of 0.6 percent to a 1 percent drop.

Orders for durable goods, which are items expected to last three years or more, were unchanged in August after falling by 2.8 percent in July.

Orders for nondurable goods were unchanged in August at $193.1 billion following a 1.2 percent increase in July.

Excluding the volatile transportation sector, factory orders fell by 1.5 percent in August after having dropped by 0.1 percent in July.

Copyright 2006 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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