Nov. 7 (Bloomberg) -- The U.S. unemployment rate rose to the highest level since 1994 as companies slashed payrolls, setting the stage for the steepest economic decline in decades and a tough start for Barack Obama’s presidency.

The jobless rate rose to 6.5 percent in October from 6.1 percent the previous month, the Labor Department reported today in Washington. Employers fired 240,000 workers after a loss of 284,000 in September, the biggest two-month slide since 2001.

The surge in jobless rolls, coupled with other signs the economy nosedived last month, puts pressure on Obama to quickly name his economic team and spell out his planned remedies. It may also spur congressional Democrats to enact in coming weeks a second fiscal stimulus package.

“The economy has entered the very deep portion of the recession and should remain there over the coming six to nine months,” said John Herrmann, president of Herrmann Forecasting LLC in Summit, New Jersey. “These numbers imply a stimulus package of closer to $500 billion, ranging over the remainder of this year and through 2009.”

Obama may address today’s report after meeting with his transition economic advisers, including billionaire investor Warren Buffett and former Federal Reserve Chairman Paul Volcker. The incoming president holds his first post-election press conference at 1:30 p.m. in Chicago.

25-Year High

The total number of unemployed Americans jumped to 10.08 million last month, the highest level in a quarter-century, today’s report showed.

Economists had anticipated a 200,000 drop in payrolls after a previously estimated 159,000 decline in September, according to the median of 78 estimates in a Bloomberg News survey. The median forecast for the unemployment rate was 6.3 percent.

“We’re heading for a deep recession -- banish the word mild from your vocabulary -- it’s big, it’s bad and it’s broad-based,” said Nariman Behravesh, chief economist at IHS Global Insight in Lexington, Massachusetts.

Stocks today recouped some of their losses from the past two days, when benchmark indexes plunged the most since 1987. The Standard & Poor’s 500 Stock Index was up 0.8 percent at 912.33 at 9:46 a.m. in New York. Ten-year Treasury note yields rose to 3.77 percent from 3.69 percent late yesterday.

Goldman’s Forecast

Goldman Sachs Group Inc. analysts downgraded their projections for the economy after today’s report, foreseeing the biggest contraction since 1982 in the fourth quarter. Goldman also projects that the unemployment rate will soar to 8.5 percent by the end of next year.

Job losses for August and September were revised up by 179,000. The economy has lost 1.18 million jobs so far this year.

Factory payrolls fell 90,000, the biggest monthly loss since July 2003, after decreasing 56,000 in September. A strike by 27,000 machinists at Boeing Co., which was resolved earlier this month, contributed to the drop, the Labor Department said.

Economists had forecast a drop of 65,000 manufacturing jobs. The decrease included a loss of 9,100 jobs in auto manufacturing and parts industries.

Today’s report also reflected the housing slump and credit crunch. Payrolls at builders dropped 49,000 after decreasing 35,000. Financial firms reduced payrolls by 24,000, after a 16,000 decline the prior month.

Auto Dealers Cut

Service industries, which include banks, insurance companies, restaurants and retailers, subtracted 108,000 workers after dropping 201,000 in the previous month. Retail payrolls decreased by 38,100, led by a loss of 20,300 jobs at auto dealerships, after a decline of 44,800.

Government payrolls increased by 23,000 after a loss of 41,000.

American Express Co., the largest U.S. credit-card company by purchases, said Oct. 30 it would eliminate 10 percent of its workforce, or about 7,000 people, to cut costs amid rising defaults as consumers fail to repay their debts.

The job cuts “will help us to manage through one of the most challenging economic environments we’ve seen in many decades,” Chief Executive Officer Kenneth Chenault said in a statement.

“Broad-based sector weakness in payroll numbers is consistent with past recessions,” John Silvia, chief economist at Wachovia Corp. in Charlotte, North Carolina, said before the report. “Layoff announcements suggest further weakness in the pipeline.”

Hours Worked

The average work week was unchanged at 33.6 hours, today’s report showed. Average weekly hours worked by production workers were also unchanged at 40.6 and average overtime hours remained at 3.6.

Workers’ average hourly wages rose 4 cents from the prior month, or 0.2 percent, to $18.21. Hourly earnings were 3.5 percent higher than in October 2007.

The loss of jobs, plunging home prices, and a record tightening of bank lending may cause consumers and businesses to keep retrenching.

Gross domestic product shrank at a 0.3 percent annual pace in the third quartet and consumer spending fell at a 3.1 percent pace, the most since 1980. Economists surveyed by Bloomberg project the economic slump will deepen this quarter.

The faltering economy and imploding financial markets helped push Obama ahead of Republican rival John McCain, a senator from Arizona, particularly in hard-fought states like Ohio and Florida where unemployment rates have jumped.

Americans also gave Democrats larger majorities in the House and Senate as voters blamed Republicans for the economic malaise. House Speaker Nancy Pelosi said this week Democrats may seek two stimulus packages if President George W. Bush limits the size of a plan to be considered during the post-election session later this month.

To contact the reporter on this story: Bob Willis in Washington at bwillis@bloomberg.net

Last Updated: November 7, 2008 09:50 EST