Report on Services Points o Deepening Recession

The vast U.S. services sector contracted sharply in October, cementing widespread fears that the world’s largest economy has slipped even deeper into recession following the Sept. 11 attacks, according to a report released Monday.

The National Assn. of Purchasing Management said its nonmanufacturing business activity index fell to its lowest level in the survey’s four-year history, plunging to 40.6 from 50.2. A reading below 50 indicates contracting activity in the services sector, which includes everything from transportation to legal and financial services.

The grim data, which followed the worst monthly labor report in two decades released Friday, stoked fears that a recession could extend well into next year and boosted market hopes for an aggressive half-point interest rate cut from the Federal Reserve when it meets today.

“The depth [of a recession] may be somewhat deeper than some people had thought,” said Ralph Kauffman, chair of NAPM’s non-manufacturing committee.

A separate report Monday showed several service industries, including financial services, food, leisure, retail and telecommunications, reported tens of thousands of layoffs in October, rounding out the second-worst month this year for corporate layoff announcements.

Outplacement firm Challenger, Gray & Christmas tallied 242,192 corporate layoff announcements in October, second only to 248,332 in September.

The NAPM index’s almost 10-point drop to 40.6 far outstripped Wall Street’s expectations for a dip to 45.9 and helped trigger a rally in stocks and U.S. Treasury securities on hopes the Fed will lower its 2.5% target for the federal funds rate to 2% today.

NAPM’s monthly industrial activity index, which measures less than one-fifth of overall economic activity, has been mired below 50 for the last 15 months, and in October hit its lowest level since the 1990-91 recession.

But until recently, the services sector has managed to withstand the severe recession in manufacturing.

NAPM said nonmanufacturing firms again slashed workers from their payrolls for the eighth straight month and at a faster pace in October, dragging down its employment index to 43.5 in October from 46.7 in September.

Meanwhile NAPM’s nonmanufacturing new orders index, seen as a leading indicator of future services sector business activity, also fell nearly 10 points to 40.4 from 49.8 in September, also its lowest in the report’s four-year history.

The only nonmanufacturing industry that grew during the month was health services.