Dec. 3 (Bloomberg) -- Service industries in the U.S. contracted the most in at least 11 years, and a measure of private payrolls showed job losses accelerated, signaling the economy’s decline deepened last month.

The Institute for Supply Management’s index of non- manufacturing businesses, which make up almost 90 percent of the economy, fell to 37.3 in November, the lowest level since records began in 1997. ADP Employer Services said companies eliminated 250,000 jobs, the most since November 2001.

Today’s figures suggest a prolonged blow to the economy from the increased financial turmoil of September and October. Economists at Goldman Sachs Group Inc. and Wachovia Corp. boosted estimates for November job losses ahead of the government’s report in two days, raising the median forecast to the biggest payroll drop in 26 years as employers from Citigroup Inc. to General Motors Corp. stepped up the pace of firings.

“What we’ve seen since mid to late September is that business activity has shut down, along with the consumer,” Stephen Gallagher, chief economist at Societe Generale in New York, said in an interview with Bloomberg Television. “There is no reason for an immediate turnaround; financial markets have not stabilized; consumers have not stabilized.”

Stocks rose as a report of an increase in online spending triggered a rally in retailer shares. Banking shares also climbed after a report showed mortgage applications surged last week as interest rates dropped. The Standard & Poor’s 500 index gained 2.6 percent to close at 870.74. Benchmark 10-year Treasury yields were at 2.66 percent at 4:15 p.m. in New York, after they reached 2.65 percent two days ago, the lowest level since daily records began in 1962.

More Weakening

The Federal Reserve’s regional economic survey showed the economy weakened across all its 12 districts as it became tougher to get credit. Retail sales, tourism spending and manufacturing declined in most places, housing markets were “weak” and commercial real estate “weakened broadly,” the Fed said today in its Beige Book release, published two weeks before officials meet in Washington to set interest rates.

The Tempe, Arizona-based ISM’s index was projected to decline to 42, according to the median forecast in a Bloomberg News survey of 64 economists. Readings below 50 signal contraction. The measure was 44.4 in October.

“Everyone is looking to control any kind of discretionary spending, as well as delaying or cutting back on even the obvious needs they have,” Anthony Nieves, chairman of the ISM survey, said on a conference call from Los Angeles. “It’s going to be grim and ugly until we see some light here, hopefully with the government intervention.”

Stimulus Plans

President-elect Barack Obama plans to push a two-year stimulus package after he takes office on Jan. 20. Fed Chairman Ben S. Bernanke this week also said he may use less conventional policies such as buying Treasuries to revive the economy.

Challenger, Gray & Christmas Inc., a Chicago-based placement firm, said today the number of announced firings surged 148 percent last month from November 2007, led by a jump at financial firms.

The Labor Department’s November jobs report may show payrolls fell by 330,000, the biggest decrease since 1982, according to a Bloomberg News survey of economists.

John Silvia, chief economist at Wachovia in Charlotte, North Carolina, lowered his forecast for November payrolls by 100,000 to a decline of 450,000, following the ISM report. Goldman Sachs economist in New York projected job losses reached 400,000 last month.

Rates Drop

Fed efforts to lower borrowing costs may have started to pay off, a report from the Mortgage Bankers Association showed. The central bank’s pledge last week to buy mortgage-backed debt sent the rate on 30-year fixed mortgages down to a three-year low, sparking a record threefold increase in applications to refinance loans.

Companies, trying to shore up profits as the economy sank, cut worker hours in the third quarter by the most in six years, a report from the Labor Department also showed today. The decline contributed to a higher-than-forecast 1.3 percent annual gain in productivity and a 2.8 percent increase in labor expenses that was smaller than economists surveyed by Bloomberg News anticipated.

“Things overall still look bad, but this, together with last week’s doubling in MBA refinancing, provide glimmers of hope,” Ian Morris, chief U.S. economist at HSBC Securities USA Inc. in New York, said in a note to clients.

Record Lows

The ISM group’s index of new orders for non-manufacturing industries decreased to 35.4 from 44 the prior month. Its gauge of employment dropped to a record-low 31.3 from 41.5, and a measure of prices paid fell to 36.6, also the lost since at least 1997.

ISM said earlier this week that its factory index dropped in November to the lowest level since 1982.

The U.S. entered a recession a year ago this month, the National Bureau of Economic Research, which dates American business cycles, said this week. At 12 months, the contraction is already the longest since the 16-month slump that ended in November 1982, and exceeds the postwar average of 10 months.

Retailers are concerned the holiday shopping season may be the worst in at least six years. Sears Holdings Corp., the largest U.S. department-store company, yesterday abandoned its earnings forecast for the remainder of the year, citing “severe conditions in the economy.”

Financial services remain in distress. Citigroup Inc., which is planning to eliminate 52,000 jobs, this week said it dropped a portion of the severance payment offered to employees who have been at the bank for a decade or longer.

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

Last Updated: December 3, 2008 16:17 EST