Signs mount of deepening recession

WASHINGTON (AP) -- The latest evidence of a deepening recession that's already the longest in a quarter-century came Wednesday in a pair of reports that found little relief in sight.

The U.S. service sector shrank far more than expected in November, as employment, new orders and prices plunged, hurting retailers, hotels and airlines. Meanwhile, Americans hunkered down heading into the holidays, forcing retailers to ring up fewer sales and factories to cut back on production.

The Institute for Supply Management's closely watched gauge of activity in service industries, where most Americans work, showed that for every company adding jobs, eight cut payrolls last month. That ratio led some economists to boost their forecasts for layoffs for November to levels not seen since the early 1980s.

"This is consistent with payrolls falling by about 500,000" for the month, said Ian Shepherdson, chief U.S. economist at High Frequency Economics in Valhalla, New York. "Let's hope it is very wrong."

Analysts expect the nation's jobless rate, when it is announced Friday, will hit 6.8 percent, on its way to a reading that they project could be closing in on 9 percent a year from now.

The view was equally gloomy in the Fed's beige book - the latest snapshot of business activity compiled by the Fed from its 12 regional banks. It reported that "overall economic activity weakened across all Federal Reserve districts" since October.

The beige book reported that retailers were bracing for a weak holiday shopping season, manufacturing activity had slowed sharply and bank lending was contracting as the financial sector endures its worst crisis in seven decades.

On Wall Street, investors took the latest batch of grim data in stride. The Dow Jones industrials gained 172.60 points to close at 8,591.69.

Many analysts expect the Fed, which cut interest rates by a full percentage point last month, to cut rates by a half-point at its policymakers' last meeting of the year on Dec. 16. In cutting rates, the Fed is trying to help stimulate lending and halt the economy's slide.

A panel for the National Bureau of Economic Research on Monday said the country has been stuck in a recession since last December. At 12 months, the current recession is already the longest since a severe 16-month slump in 1981-82. Many economists say this downturn will ultimately set a new record for the post-World War II period.

"I am looking for this recession to last 18 months, ending in June," said David Wyss, chief economist at Standard & Poor's in New York.

State Street Corp. on Wednesday said it will cut up to 1,800 jobs, or roughly 6 percent of its global work force, between now and the end of the first quarter of next year to reduce operating costs.

The Boston-based financial services company said it will reduce its staff mostly by consolidating middle and senior management ranks. Most of the cuts will be in North America, with the rest in Europe and the Asia-Pacific region. The moves will save $375 million to $400 million annually, State Street said.

The recession has hit retailers especially hard as consumers have cut spending. Stores had been frantically marking down holiday merchandise well before the traditional start of the shopping season, which began Friday.

Steep discounts may be one tactic that eventually pulls the country out of recession, said David Resler, chief economist at Nomura Securities, pointing to mortgage applications, which more than doubled last week as some mortgage rates fell.

"We saw what happens when people are given the opportunity to buy something on sale the day after Thanksgiving. People literally kill for lower prices," he said, referring to a Wal-Mart Stores Inc. employee who was trampled to death Friday in New York.

In a third report, the Labor Department said productivity, the amount of output per hour of work, rose at an annual rate of 1.3 percent in the July-September quarter. That was slightly higher than the 1.1 percent increase initially reported a month ago. And it was better than the 0.9 percent rise economists had expected.

Wage pressures, as measured by unit labor costs, rose at an annual rate of 2.8 percent. That was the biggest jump since a 4.5 percent rate in the fourth quarter of last year, but it fell below the 3.6 percent advance originally reported.

The Fed monitors productivity and wages to make sure inflation isn't getting out of hand. But analysts say worries about the deepening recession would now trump any inflation concerns in the minds of Fed policy-makers.

The ISM report said its services sector index fell to 37.3 in November from 44.4 in October. That was far below the reading of 42 analysts had expected. Of the 18 industries in the survey, including warehousing, real estate, restaurants and wholesale trade, only one - health care and social assistance - reported growth.

One reason labor costs have eased is that companies have been aggressively laying off workers as demand has fallen. Job losses through October this year have totaled 1.2 million. More than half that figure came since August as the economy's downward spiral accelerated.

Economists predict wages will remain depressed as job losses grow. Productivity growth will probably turn negative in the current quarter and the first three months of 2009 before beginning to rebound, said Nariman Behravesh, chief economist at IHS Global Insight. He forecast that productivity growth for all of next year will be a weak 0.9 percent.

Analysts had expected a big downward revision in productivity for the third quarter given that overall output, as measured by the gross domestic product, was revised to show a decline of 0.5 percent at an annual rate. That was a bigger drop than the 0.3 percent decrease originally reported. But the drop in output was outpaced by an even bigger decline in hours worked.

Also Wednesday, the Securities and Exchange Commission adopted new rules designed to stem conflicts of interest and provide more transparency for Wall Street's credit-rating agencies. Those agencies have been widely faulted for their role in the subprime mortgage troubles and ensuing credit crisis.

The three firms that dominate the $5 billion-a-year credit-rating industry - Standard & Poor's, Moody's Investors Service and Fitch Ratings - have been criticized for failing to identify risks in subprime mortgage investments, whose collapse helped set off the global financial crisis.

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Associated Press Writers Jeannine Aversa and Marcy Gordon contributed to this report.

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