By Timothy R. Homan Oct. 29 (Bloomberg) -- Orders for U.S. durable goods, excluding cars and aircraft, fell for a second straight month in September as the credit freeze and a slump in sales caused businesses to cut back on investment. The 1.1 percent drop in bookings of goods meant to last several years was less than forecast and followed a 4.1 percent decrease in August. A rebound in aircraft orders, a volatile category, and an increase in defense bookings unexpectedly pushed total orders up 0.8 percent. The slump in manufacturing worsened in October as financing dried up, according to regional factory surveys. That suggests declines in investment spending will contribute to a contraction in the U.S. economy for the second straight quarter. Economists estimate a government report tomorrow will show gross domestic product shrank in the July-through-September period. ``We see businesses that have changed gears in reaction to the financial markets, worries about credit availability and worries about consumers,'' said Stephen Gallagher, chief U.S. economist at Societe Generale SA in New York, who forecast total orders would increase. ``It should lead to more decisive negative readings on capital spending in upcoming quarters.'' Federal Reserve policy makers, meeting today, are projected to lower interest rates further to help increase the flow of credit. Policy makers will cut the benchmark rate half a point to 1 percent, according to the median forecast in a Bloomberg News survey. The announcement is scheduled for about 2:15 p.m. in Washington. Treasuries, Stocks Treasuries gained and stocks fell. Benchmark 10-year note yields were at 3.80 percent at 10:00 a.m. in New York, from 3.85 percent late yesterday. The Standard & Poor's 500 Stock Index declined 1.1 percent to 929.8. Economists projected orders excluding transportation equipment would fall 1.5 percent, after a previously reported 3.3 percent drop in August. Total orders were expected to fall 1.1 percent, according to the median of 70 forecasts. The decline in August was revised to a 5.5 percent drop from the 4.8 percent decrease released previously. Bookings for non-defense capital goods excluding aircraft, a measure of future business investment, fell 1.4 percent after a 2.2 percent decrease in August. Shipments of those items, used in calculating gross domestic product, increased 2 percent following a 2.1 percent drop. Demand for transportation equipment climbed 6.3 percent after a 9.3 percent decrease in August, today's report showed. Orders for commercial aircraft jumped 30 percent after plunging 38 percent a month earlier. Economists' Focus The volatility in aircraft demand in August and September illustrates why economists prefer to exclude those figures when trying to determine underlying trends. Orders for autos have also been volatile in the last couple of months. They rose 3 percent in September following an 8.8 percent drop a month earlier. Boeing Co., the world's second-largest commercial planemaker, said it received 41 orders for aircraft in September, up from 38 the previous month. Still, the Chicago-based company had its third-quarter profits cut by 38 percent as a strike by about 27,000 machinists slowed deliveries. Workers yesterday agreed to vote on a new contract proposal on Nov. 1. Some airlines have canceled or deferred their plane orders this year as the economy weakened. Southwest Airlines Co., the largest low-fare carrier, said this month it will add no more than 10 new Boeing aircraft, down nearly a third from an earlier projection. Manufacturing Shrinks National manufacturing reports signaled widespread declines in bookings as companies couldn't secure financing for big purchases. Manufacturing contracted in September at the fastest pace since the 2001 recession, the Tempe, Arizona-based Institute for Supply Management reported earlier this month. Regional reports indicate the decline in manufacturing gained momentum along the East Coast in October as the credit squeeze deepened. The New York Fed's general economic index fell this month to the lowest level since record-keeping began in 2001. The Philadelphia Fed said manufacturing in its district shrank at the fastest pace in almost two decades. The increase in shipments of non-defense capital goods excluding planes reported by Commerce today may lead some economists to boost forecasts for growth in the third quarter. Still, the decline in orders for such goods indicates growth in the last three months of the year will be less than currently anticipated. GDP Report Advance figures on gross domestic product, due from the Commerce Department tomorrow, may show the economy contracted at a 0.5 percent annual rate from July through September, according to a Bloomberg survey. It would be the second drop in a year and the biggest since the 2001 recession. Auto-industry figures released this month show September purchases of cars and light trucks in the U.S. fell 27 percent, making for the worst sales month since 1991. General Motors Corp., the largest U.S. automaker, said this week that it plans to halt production for a week at car plants in Kentucky and Michigan. Whirlpool Corp., the world's largest appliance maker, said yesterday it will cut 5,000 jobs and forecast lower annual profit as the global credit crunch and U.S. housing slump clipped appliance sales. To contact the report on this story: Timothy R. Homan in Washington at thoman1@bloomberg.net

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