By Bob Willis Nov. 3 (Bloomberg) -- Manufacturing in the U.S. contracted in October at the fastest pace in 26 years as the credit crisis deepened and companies reduced orders. The Institute for Supply Management's factory index dropped to 38.9, worse than anticipated by economists surveyed by Bloomberg News and the lowest level since September 1982, the Tempe, Arizona-based group reported today. A reading of 50 is the dividing line between expansion and contraction. The report raises the risk that the current economic slump will be deeper than the last two recessions in 2001 and 1991 as the credit drought and weakening sales force businesses to retrench. The drumbeat of dire news has focused voters' attention on the economy ahead of tomorrow's presidential election. ``Manufacturing is definitely in a deep recession right now,'' John Lonski, chief economist at the Moody's Capital Markets Group in New York, said in an interview with Bloomberg Television. The ISM index was projected to drop to 41, according to the median of 75 economists' forecasts in a Bloomberg News survey. Estimates ranged from 38 to 48.5. Stocks erased gains following the report. The Standard & Poor's 500 index fell 0.1 percent to 967.76 at 10:42 a.m. in New York. Treasury securities increased. Housing Slump Spending on construction projects dropped 0.3 percent in September, a smaller decline than forecast, as work on manufacturing plants and utilities helped offset declines in homebuilding, a report from the Commerce Department also showed. Private residential projects declined 1.3 percent in September, while federal spending had the biggest drop since February 2007. The purchasing managers' gauge of new orders for factories decreased to 32.2, the lowest level since 1980, from 38.8 the prior month. The production measure fell to 34.1 from 40.8. The index of prices paid dropped to 37 from 53.5. Energy prices have plunged from their peaks in July, when a barrel of crude oil reached $147. The employment index decreased to 34.6 from 41.8 in August. The economy has lost more than three-quarters of a million jobs so far this year. Orders from overseas have weakened as economies abroad falter. ISM's export gauge dropped to 41, the lowest reading since records for this component began in 1988. Exports `Burned Out' ``That beacon of light from overseas economies has basically burned out,'' said Brian Bethune, chief U.S. financial economist at IHS Global Insight in Lexington, Massachusetts. ``We're now at the weakest point of the cycle in terms of the U.S. economy.'' As financial markets imploded in the last two months and the Bush administration led a massive bid to rescue credit markets, Democratic candidate Barack Obama took the lead in polls over Republican rival John McCain as voters perceived the Illinois senator would be better able to address economic concerns. The seizing up of credit markets since mid September has worsened the outlook. Companies are cutting back on investments and hiring as consumer spending in the third quarter plunged by 3.1 percent, the biggest decline in 28 years. GMAC LLC, the lender partly owned by General Motors Corp., is telling some GM dealers it will no longer provide financing to buy vehicles because of its own reduced funding, according to letters sent to the retailers. Credit Not Available ``Turbulence in the markets reduced our access to funds and increased the cost of funds where available,'' GMAC Chief Executive Officer Alvaro de Molina said in a letter sent Oct. 21 to the California New Car Dealers Association. ``In response, we adjusted our credit policy to reflect the reduced level of funding availability.'' The economy shrank at a 0.3 percent pace in the third quarter, with spending on equipment and software declining 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. In a bid to avert the downturn from becoming the worst recession in the postwar era, the Federal Reserve last week cut its key rate a half point to 1 percent, matching a 50-year low. ``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.'' To contact the reporter on this story: Bob Willis in Washington at bwillis@bloomberg.net

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