Nov. 5 (Bloomberg) -- Service industries in the U.S. contracted the most on record in October as credit dried up and consumers reined in spending.

The Institute for Supply Management's non-manufacturing index, which covers almost 90 percent of the economy, fell to 44.4, below economists' forecasts and the worst result since records began in 1997. A private survey indicated that companies axed 157,000 workers last month.

Spending by consumers and businesses is likely to keep declining into the year-end holiday season as loss-riddled banks make it more difficult to borrow. The economy's deterioration contributed to the wave of voter discontent with Republican rule that swept Illinois Senator Barack Obama to victory in the U.S. presidential election yesterday.

``The recession is getting deeper,'' said Kevin Logan, a senior market economist at Dresdner Kleinwort in New York. ``Caution on the part of businesses will lead to bigger declines in employment and investment,'' he said, predicting that analysts will lower their projections for the government's October employment report on Nov. 7.

U.S. treasuries were little changed at 4:50 p.m. in New York. The Standard & Poor's 500 Stock Index fell 5.3 percent to close at 952.77.

Economists forecast the Tempe, Arizona-based ISM's index would fall to 47 from 50.2 in September, according to the median of 69 projections in a Bloomberg News survey. A reading of 50 is the dividing line between growth and contraction.

Manufacturing Slump

A report from the institute earlier this week showed manufacturing in the U.S. shrank in October at the fastest pace in 26 years as companies trimmed orders.

Companies in the U.S. cut an estimated 157,000 jobs in October, the most in almost six years, a report from ADP Employer Services today also showed. Firings spread from automakers, financial and housing-related companies to retailers and other services as the economic slump deepened.

Even bigger declines in payrolls are likely in train. Employers announced 112,884 job cuts last month, up 79 percent from October 2007 and the most in almost five years, a report from Chicago-based Challenger, Gray & Christmas Inc. said today.

The ISM's employment index dropped to 41.5 from 44.2 in September. The institute's business activity index fell to 44.2 from 52.1, while its new orders gauge decreased to 44 from 50.8.

Less Inflation

The group's measure of prices paid by non-manufacturing businesses fell to 53.4, the lowest level since July 2003.

Energy costs in October continued to recede from July's record highs. The average price for a barrel of crude oil last month was $76.72, compared with $103.76 a month earlier.

While factories have cut payrolls every month since July 2006, other businesses have joined in reducing employment this year. Service industries cut 82,000 workers from their payrolls in September, the fourth straight monthly decline, the Labor Department said last month.

The U.S. probably lost 200,000 jobs in October, bringing the total decline in payrolls so far this year to nearly 1 million, economists surveyed by Bloomberg forecast a Labor Department report Nov. 7 will show. The unemployment rate may jump to its highest level in more than five years, the survey showed.

The reduced availability of credit, along with the loss of jobs is likely to hurt spending during the holiday shopping season, the largest source of revenue for most stores.

Spending Slump

Circuit City Stores Inc., the second-biggest electronics retailer, said this week it will close 155 American stores, reducing the company's workforce by 17 percent in order to conserve cash.

``Since late September, unprecedented events have occurred in the financial and consumer markets causing macroeconomic trends to worsen sharply,'' James Marcum, chief executive officer of the Richmond, Virginia-based company, said in a Nov. 3 statement. ``The weakened environment has resulted in a slowdown of consumer spending.''

Such spending, which comprises about 70 percent of the U.S. economy, dropped at a 3.1 percent annual pace in the third quarter, the first decline since 1991 and the biggest since 1980, the Commerce Department said Oct. 30.

The slowdown caused the economy to contract last quarter at the fastest pace since the 2001 recession.

To contact the reporter on this story: Timothy R. Homan in Washington at thoman1@bloomberg.net

Last Updated: November 5, 2008 17:06 EST