Bernanke warns about state budget cuts AGENCIES

WASHINGTON — United States Federal Reserve chairman Ben Bernanke warned yesterday that cuts in state and local government spending was slowing the recovery in the world’s largest economy but investors found other reasons for optimism to drive stocks higher in early trade.

In his first public comments since a government report last week showed the recovery lost momentum in the spring, Mr Bernanke also said the economy continued to grow at a moderate pace after the worst recession in a generation, although a weak housing sector and other pillars of the economy remained moribund.

“Many states and localities continue to face difficulties in maintaining essential services and have significantly cut their programmes and work forces,” Mr Bernanke said.

He added: “These cuts have imposed hardships in local jurisdictions around the country and are also part of the reason for the sluggishness of the national recovery. We have a considerable way to go to achieve a full recovery in our economy.”

The US economy grew at a pace of just 2.4 per cent in the April-to-June quarter, down from 3.7 per cent growth at the start of the year. It was the slowest showing in nearly a year and too weak to drive down near double digit unemployment.

Investors paid little heed to the Fed chairman yesterday, as sentiment was boosted by strong manufacturing and earnings data.

The Institute of Supply Management said its manufacturing index fell to 55.5 points from 56.2 in June. Despite the drop, the reading beat market expectations of 54.2. Meanwhile, Europe’s largest bank HSBC reported earnings more than doubled in the first half, boosting optimism about the global recovery.