updated 10/1/2008 11:34:53 AM ET 2008-10-01T15:34:53

A measure of U.S. manufacturing activity contracted more than expected last month, hitting the lowest level since the aftermath of the Sept. 11 attacks, as new orders slowed dramatically.

Major Market Indices

The Institute for Supply Management on Wednesday released a September reading of 43.5, the lowest level since October 2001. The reading dropped from 49.9 in August, the largest one-month decline since January, 1984, when it fell to 60.5 from 69.9.

A reading above 50 signals growth.

"The headline ISM has plunged into recession territory," said Ian Shepherdson, chief U.S. economist at High Frequency Economics.

Wall Street economists had predicted a much stronger reading of 49.5, according to the consensus estimate of those surveyed by Thomson/IFR. The index has been hovering on what economists call "the boom-bust" line for most of the year.

Meanwhile, stocks fell in midmorning trading as investors prepared for a possible Senate vote on the government's proposed $700 billion financial sector bailout.

The survey of purchasing managers found new orders fell to 38.8 in September from a reading of 48.3 in August. Employment, deliveries, inventories and manufacturers' order backlogs also fell.

Industries reporting contraction included apparel, furniture, machinery, transportation equipment and electrical appliances.

High prices for commodities, along with tight credit conditions, have begun to squeeze companies. Pilgrim's Pride Corp., the nation's largest chicken producer, said last week it expected a "significant" fiscal fourth-quarter loss. Industrial automation and control company Rockwell Automation Inc. said Wednesday it would cut 600 sales and administrative jobs "in light of current and anticipated market conditions."

Separately, the Commerce Department on Wednesday said construction activity was flat in August, better than the 0.5 percent fall economists expected. The big surprise was a 0.3 percent rise in residential activity, the first increase in the housing area since March 2007.

Still, the government revised July activity to show a much bigger drop of 1.4 percent, compared to the 0.6 percent decline initially reported.

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