Jan. 6 (Bloomberg) -- The U.S. economy ended the year in a steep decline, with factory orders, home sales and service industries all contracting further, reports showed today.

The Institute for Supply Management’s index of non- manufacturing businesses was 40.6 for December, a higher-than- forecast reading that was still the second-worst on record. The National Association of Realtors index of pending home resales fell 4 percent in November, and the Commerce Department said orders at U.S. factories slumped for a fourth month.

Today’s data, covering three separate parts of the economy, show the broad-based nature of the slump and may put pressure on Congress to quickly enact President-elect Barack Obama’s fiscal- stimulus plan. With little prospect of growth in private demand, a turnaround may hinge on the tax and spending proposals Obama is aiming at middle-class households and businesses.

“The economy fell off a cliff in the fourth quarter and is most likely still falling,” said James O’Sullivan, a senior economist at UBS Securities LLC in Stamford, Connecticut. “We do expect some stabilization by mid-year, partly because of Obama’s plan and partly because” of the Federal Reserve’s interest-rate cuts and emergency lending programs, he said.

Treasuries rose with the yield on the benchmark 10-year note falling to 2.45 percent at 5:15 p.m. in New York, from 2.47 percent late yesterday. The Standard & Poor’s 500 Stock Index rose 0.8 percent to close at 934.70.

Manufacturing Shrinks

The Tempe, Arizona-based ISM’s index was projected to decline to 36.5, according to the median forecast in a Bloomberg News survey of 61 economists. The group said last week its gauge of manufacturing fell to 32.4 in December, from 36.2 the previous month. Readings below 50 indicate a contraction.

“I don’t anticipate us seeing growth any time soon,” Anthony Nieves, chairman of the ISM’s non-manufacturing survey, said on a conference call with reporters. “Many companies may have been waiting until after the holiday season” before paring their workforce. “We might even see deeper job cuts as we move into the first quarter.”

Obama met yesterday with congressional leaders from both parties at the Capitol to help craft and shore up support for a two-year plan worth about $775 billion to boost the sagging economy. He said the plan would cut taxes for individuals and businesses and spend money on government programs to rebuild the nation’s infrastructure.

Pending Sales

The drop in pending home sales exceeded economists’ median forecast of a 1 percent fall. The report showed declines of 7.2 percent in the Northeast, 6.7 percent in the Midwest and 2.4 percent in the West. Pending sales fell 2.2 percent in the South.

Pending resales are considered a leading indicator because they track contract signings. Closings, which typically occur a month or two later, are tallied in the Realtors’ monthly existing-home sales report. That report for December is scheduled to be released Jan. 26.

“The housing stress just doesn’t end,” said Ethan Harris, co-head of U.S. economic research at Barclays Capital Inc. in New York.

Expectations that policy makers’ actions will be effective in limiting the damage have pushed the Standard and Poor’s Supercomposite Homebuilding Index up by 70 percent from an eight-year low reached on Nov. 21. Still, economists project homebuilding, part of the services index, may decline for a fourth year as foreclosures mount.

Factory Slump

Orders to U.S. factories fell 4.6 percent in November after a revised 6 percent decrease the prior month that was larger than initially estimated, the Commerce Department said. The back-to-back decline was the biggest since records began in 1992.

The bad news probably continued last month. ISM’s manufacturing report issued last week showed the measure of new orders reached its lowest level since record-keeping began in 1948, and prices slid the most since 1949.

The economy lost jobs in December for a 12th month as firings rippled from factories and construction companies to retailers and banks, economists project the Labor Department’s Jan. 9 employment report will show.

Merchants from Macy’s Inc. to AnnTaylor Stores Corp. were among those slashing prices by 65 percent or more to attract holiday shoppers. Sears Holdings Corp. closed underperforming stores.

“A lot of businesses have been caught flat-footed by how deep and accelerated this recession has been,” Bill Taubman, chief operating officer of shopping-mall owner Taubman Centers Inc., said in a Dec. 26 interview on Bloomberg Television.

To contact the reporter on this story: Shobhana Chandra in Washington at schandra1@bloomberg.netBob Willis in Washington bwillis@bloomberg.net.

Last Updated: January 6, 2009 17:33 EST