Feb. 4 (Bloomberg) -- U.S. service industries shrank at a slower pace than forecast in January, a positive trend threatened by soaring joblessness that will likely cause further cutbacks in consumer spending.

The Institute for Supply Management’s index of non- manufacturing businesses, which make up almost 90 percent of the economy, rose to 42.9, still below the reading of 50 that signals contraction. Anthony Nieves, who heads the ISM survey, said stabilization is unlikely until payrolls halt their “freefall.”

Time Warner Inc., the world’s largest media company, Walt Disney Co. and United Parcel Service Inc. all reported weaker revenue and profits this week than forecast, underscoring the hit to services from the deepest slide in consumer spending in the postwar era. Purchases may keep falling after a report today indicated employers cut more than half a million jobs in January.

While “the rate at which the economy is deteriorating is beginning” to slow, “we’re still a long way from bottoming out,” said Mark Vitner, a senior economist at Wachovia Corp. in Charlotte, North Carolina. “We’re still on pace to have the worst job losses of any recession” since World War II.

Stocks and Treasury securities fell. The Standard & Poor’s 500 index dropped 0.75 percent to close at 832.23. The yield on the benchmark 10-year note rose to 2.92 percent from 2.89 percent late yesterday.

Job Cuts

Companies in the U.S. cut an estimated 522,000 jobs in January, a 12th consecutive reduction, a report from ADP Employer Services today showed. Job cuts announced by U.S. employers more than tripled last month from a year earlier, led by cutbacks at retailers following the worst holiday-shopping season in four decades, the Chicago-based placement firm Challenger, Gray & Christmas Inc. also said today.

The ISM group’s index of new orders for non-manufacturing industries rose to 41.6 from 38.9 the prior month. Its gauge of employment decreased to 34.4 from 34.5 in December, and a measure of prices paid climbed to 42.5 from 36.1.

“Deflation is a real risk facing the economy,” Lawrence Summers, director of the National Economic Council at the White House, said today on a conference call with reporters. “We do not have time to wait” to approve the fiscal-stimulus package the Obama administration is pushing in Congress, he said.

Confidence ‘Shattered’

“Business confidence is shattered,” said Ryan Sweet, an economist at Moody’s Economy.com in West Chester, Pennsylvania. “Businesses are very reluctant to hire and they’re aggressively cutting costs.”

The reports come two days before the Labor Department issues its January employment report. Economists project payrolls dropped by 540,000 last month after the economy lost 2.6 million jobs in 2008, according to a Bloomberg survey. The jobless rate is forecast to have climbed to a 16-year high of 7.5 percent.

The economy won’t stabilize “until we see employment start leveling off to where it’s not in that freefall,” ISM’s Nieves, said in a conference call with reporters. “I’m not seeing anything that’s instilling confidence.”

Retail Slump

Retailers were among the areas that shrank most last month, the ISM report showed. Macy’s Inc., the second-largest U.S. department-store company, said this week it is cutting 7,000 jobs, or 3.9 percent of its workforce, to reduce costs after slashing prices to lure shoppers during the worst holiday season in 40 years. Comparable-store sales have dropped in 10 of the past 11 months.

Seattle-based Starbucks Corp., the world’s largest chain of coffee shops, said last week it will cut 6,700 jobs and close 300 more stores after reporting first-quarter profit that fell more than analysts estimated.

“The pace of weakening in the business environment and the global economy has been accelerating,” Starbucks Chief Executive Officer Howard Schultz said on a Jan. 28 conference call. “I anticipate that our results could remain under pressure until the economy begins to recover.”

UPS, the world’s largest package-delivery company, said yesterday it is freezing management salaries and suspending retirement contributions after U.S. volume plunged the most in nine years.

Stimulus Package

The U.S. economy contracted at a 3.8 percent annual pace in the fourth quarter, the most since 1982, the Commerce Department said on Jan. 30. Consumer spending declined at a 3.5 percent pace following a 3.8 percent decrease in the previous three months. It was the first time decreases exceeded 3 percent in consecutive quarters since records began in 1947.

Consumer confidence sank to a record low last month, according the New York-based Conference Board.

Obama is urging Congress to continue to make progress on economic stimulus legislation. The House of Representatives last week approved an $819 billion plan and the U.S. Senate is now considering a package of tax cuts and spending programs of almost $900 billion.

Federal Reserve policy makers last week voted to keep the benchmark overnight lending rate between banks in a range of zero to 0.25 percent and said there was a “significant” risk the economy would not recover until 2010.

To contact the reporter on this story: Courtney Schlisserman in Washington cschlisserma@bloomberg.net.

Last Updated: February 4, 2009 16:35 EST