By Shobhana Chandra Nov. 26 (Bloomberg) -- Spending by U.S. consumers dropped in October by the most since the 2001 contraction, signaling the economy is sinking into a deeper recession. The 1 percent decline in purchases followed a 0.3 percent drop in September, the Commerce Department said today in Washington. A separate report from Commerce showed business investment also tumbled last month. The biggest consumer spending slump in three decades is likely to persist as home prices fall and job losses mount, threatening the holiday sales outlook at retailers from Zale Corp. to Best Buy Co. Faltering demand has caused the Federal Reserve, Treasury and President-elect Barack Obama to ratchet up plans to ease the credit crisis. ``Everybody is cutting back at the same time,'' Christopher Low, chief economist at FTN Financial in New York, said before the report. ``This takes us out of the generic recession category and puts us in the severe recession category.'' A Labor Department report showed that initial claims for unemployment insurance last week slipped to 529,000 from 543,000 the prior week, while remaining close to the highest level since 1992. Treasuries, which rose earlier in the day, stayed higher after today's reports. Yields on benchmark 10-year notes fell to 3.05 percent at 8:38 a.m. in New York, from 3.12 percent late yesterday. Futures contracts on the Standard & Poor's 500 Stock Index fell 2.1 percent to 835.40. Economists Forecast Economists forecast spending would fall 1 percent, after according to the median of 72 estimates in a Bloomberg News survey. Projections ranged from declines of 0.4 percent to 2 percent. The report showed incomes rose 0.3 percent after a 0.1 percent gain in September, and measures of inflation decelerated. Orders for durable goods fell 6.2 percent last month, twice as much as forecast and the biggest drop in two years, Commerce reported separately. Retailers are concerned about the November-December holiday season, which brings in one-third or more of annual revenue. Zale, the biggest U.S. jewelry chain by stores, yesterday rescinded its annual forecast, saying in a statement that it ``does not believe it can reliably gauge likely holiday performance or sales in the balance of fiscal 2009.'' Today's spending report also confirmed inflation is retreating as demand wanes. The price gauge tied to spending patterns fell 0.6 percent in October and was up 3.2 percent from the same month in 2007. Inflation Measure The Fed's preferred gauge of prices, which excludes food and fuel, was unchanged. In the 12 months ended in October, the measure was up 2.1 percent, the smallest year-over-year gain since February. Adjusted for inflation, spending fell 0.5 percent, a fifth consecutive decline. The last time price-adjusted spending dropped as many months in a row was in 1990-91. The decrease in spending combined with the increase in incomes pushed the savings rate up to 2.4 percent from 1 percent in September. Today's report showed inflation-adjusted spending on durable goods, such as autos, furniture, and other long-lasting items, fell 3.8 percent last month. Purchases of non-durable goods decreased 0.6 percent, and spending on services, which account for almost 60 percent of all outlays, climbed 0.2 percent. Quarterly Slide Consumer spending dropped at a 3.7 percent annual pace in the third quarter, more than the government had previously forecast and the biggest plunge since 1980, revised Commerce figures showed yesterday. The economy shrank 0.5 percent, also faster than initially estimated. The freeze in credit is restricting purchases of expensive goods from cars to homes. To lure buyers, Ford Motor Co., the second-biggest U.S. automaker, said it will offer employee pricing to all buyers from Nov. 19 through Jan. 5, on almost all 2008 and 2009 Ford, Lincoln and Mercury brand models. The Fed yesterday announced two new steps to unfreeze credit for homebuyers, consumers and small businesses, committing up to $800 billion. Upon taking office next year, Obama is likely to propose an economic-stimulus package three times larger than the one contemplated only weeks ago, with the main focus on infrastructure projects, aides and lawmakers said this week. To contact the reporter on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net

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