Manufacturing shrinks to lowest level since 2001

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 late-morning 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.

Tony Crescenzi, an analyst at Miller Tabak & Co., said the poor reading raised the chances the Federal Reserve would make an emergency, between-meeting cut in its target short-term interest rates. The Fed's next scheduled meeting is on Oct. 28 and Oct. 29.

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."