Chicago Purchasers Index falls by record amount

A measure of U.S. business activity sank by the most on record in October as gauges of production and new orders plummeted.

The Institute for Supply Management-Chicago said today its business index decreased to 37.8 this month, the lowest level since the 2001 recession, from 56.7 in September. The monthly drop is the biggest since the index started in 1968. Fifty is the dividing line between growth and contraction.

Businesses are paring production and investment plans as the biggest financial crisis since the Great Depression makes credit harder to get and discourages consumer spending. Economists surveyed by Bloomberg News early this month forecast the economy would contract in the second half of the year.

``This is consistent with a pretty good-sized recession,'' Joel Naroff, president of Naroff Economic Advisors in Holland, Pennsylvania, said before the report. ``What we're debating now is when the recession began.''

The index was projected to fall to 48, according to the median forecast of 58 economists surveyed by Bloomberg News. Estimates ranged from 43.6 to 54.5.

Confidence Plunges

Another private survey showed confidence among U.S. consumers also fell by the most on record this month. The Reuters/University of Michigan final index of consumer sentiment dropped to 57.6 from 70.3 in September, the biggest decline since monthly data began in 1978. The measure averaged 85.6 in 2007.

Earlier today, the Commerce Department reported that personal spending dropped 0.3 percent in September, a decline not exceeded in four years, after a flat reading the prior month. Personal income rose 0.2 percent and a measure of inflation cooled.

The Chicago report's measure of new orders fell to 32.5 from 53.9 in September. The production gauge sank to 30.9, the lowest since 1980, from 71.4, which had been the highest since October 2004.

Order backlogs dropped to 39 from 54.9, while the employment index decreased to 41.5 from 49.1.

Job cuts are mounting. Whirlpool Corp., the world's largest appliance maker, will cut 5,000 jobs, or 6.8 percent of its workforce, and forecast lower annual profit as the global credit crunch and U.S. housing slump clips appliance sales, the Benton Harbor, Michigan-based company said this week.

The global financial crisis, declining home values, rising unemployment and lower consumer confidence will keep appliance sales from rebounding anytime soon, Chief Executive Officer Jeff Fettig said in a statement.

Inventories

The Chicago group's inventories index jumped to 56.5 from 37.7 the prior month, when it reached its lowest since February 2002.

The purchasing managers' measure of prices paid for raw materials declined to 53.7 from 80.7.

The economy shrank at a 0.3 percent pace in the third quarter, led by a 3.1 percent decline in consumer spending that was the biggest drop since 1980, the government said yesterday. Business spending on equipment and software fell at a 5.5 percent rate, the biggest drop since the first quarter of 2002. Economists surveyed by Bloomberg forecast the economy will shrink at a 0.8 percent rate in the fourth quarter.

Fed's Rate Cut

The Federal Reserve this week cut its key rate a half point to 1 percent, matching a half-century low, in a bid to avert the worst U.S. recession in the postwar era.

``Business equipment spending and industrial production have weakened in recent months, and slowing economic activity in many foreign economies is damping the prospects for U.S. exports,'' the Fed said. ``Downside risks to growth remain.''

Economists monitor the Chicago index for an early reading on the outlook for U.S. manufacturing, which makes up about 12 percent of the economy.

Manufacturing in the U.S. probably contracted in October for a seventh time in nine months, economists project a report Nov. 3 will show. The Institute for Supply Management's factory index probably dropped to 42 from 43.5 in September, according to the median forecast in a Bloomberg survey of economists.