With the exception of the long bond, intermediate and long-dated Treasuries are up this morning, though off earlier highs. Stock prices are mixed to modestly higher in choppy trading. Today’s economic news was mixed but the major release was much more bearish than observers were expecting.

The Institute for Supply Management (ISM) said its index on the nation’s manufacturing sector came in at 38.9 for October. Any reading below 50.0 indicates a general contraction in activity relative to the preceding month and October’s reading was the lowest since September of 1982. Analysts had predicted an index of about 41.5 following September’s 43.5. In the last twelve month’s, the index has registered 50.0 or above only four times and the strongest of those readings was 50.7.

The news release includes the following explanatory comment by Norbert J. Ore, chair of the ISM, “The PMI indicates a significantly faster rate of decline in manufacturing when comparing October to September. It appears that manufacturing is experiencing significant demand destruction as a result of recent events, with members indicating challenges associated with the financial crisis, interruptions from the Gulf hurricane, and the lagging impact from higher oil prices.”

A modest bright spot was a tame inflation indicator in latest data. The prices index came in at 37.0. This was the first contraction reading since December of 2006 and the lowest reading since December of 2001.

The headline number of the other economic release of the day was more bullish than expected but revisions to past data are offering some counterbalance. The Commerce Department said that the seasonally adjusted, annualized pace of construction spending fell by 0.3% in September. The decline was smaller than the 0.7% or 0.8% that analysts were predicting and August’s originally reported flat reading (0.0%) was revised to an increase of 0.3%. However, July’s previously reported decline of 1.4% (already revised from an originally reported drop of 0.6%) was once again revised to a decline of 2.4% — the largest in over two years.

The housing arena remained a weak spot. The report said the pace declined in the residential sector by 1.3%. August’s originally reported increase of 0.3% was revised up to a gain of 1.9%, the largest jump since December of 2005. But July’s previously reported decline of 3.7% was revised to a steeper drop of 5.9%. Though July’s spending pace was lower, September’s was the second lowest since December of 2000.

This week’s economic calendar contains a couple of heavyweight releases. Today’s ISM Index was one and the other is Friday’s employment report for last month.

Tomorrow, the report on factory orders for September will be released. The trend in orders provides some insight regarding demand levels and upcoming production activity. In the report for August, the Commerce Department said that the seasonally adjusted level of new orders fell by 4.0%, the largest decline since October of 2006. In addition, July’s originally reported increase of 1.3% was revised to a gain of just 0.7%.

A particularly volatile category is transportation and the order level fell there by 9.1% in August. But even excluding the category, orders were down by 3.3%, the biggest drop since September of 2001. Another closely watched category is ex-defense orders since defense demands are not governed by standard market forces. Defense orders rose in August by 3.6%, leaving ex-defense orders down by 4.2%, the biggest drop in a year.

The report said that durable goods orders fell by 4.8%, the largest decline in twenty months. Orders for non-durable items declined by 3.3%, the biggest drop in two years.

Another key category is nondefense capital goods minus aircraft — seen as a gauge of core business demand. The order level there was down by 2.4% in August, the biggest decline in twenty months.

According to last Wednesday’s report on durable goods orders for September, they rose by 0.8% but August’s previously reported decline of 4.8% was revised to a deeper drop of 5.5%, making it the biggest contraction since October of 2006. Moreover, declines were posted in the ex-transportation, ex-defense, and ex-defense minus aircraft categories.

Despite the modest increase in durable orders, analysts are calling for a decline in overall factory orders of between 0.7% and 1.0%.

On Wednesday, the ISM will release its index for the non-manufacturing or services sector of the economy. The current services index, the NMI or Non-Manufacturing Index is new — first published last January. It is a composite of four seasonally adjusted indices: business activity, new orders, employment, and supplier deliveries. In September, the index came in at 50.2, down from August’s 50.6. Like the manufacturing index, any reading over 50.0 indicates a general expansion for the month.

The highest reading this year is only 52.0 and the average has been 49.5. This suggests that the sector is basically idling.

Before the NMI was instituted, the business activities index was the headline indicator on the services sector, but it is derived from a single question in the survey of business purchasing managers. The business activities index for September came in at 52.1, up from August’s 51.6 and the highest reading since May.

The report contained another encouraging inflation indicator. The prices index came in at 70.0. While still reflecting strong increases, it was down from August’s 72.9 and was the lowest reading since February.

For October, the consensus forecast range is between 48.5 and 49.0.

On Thursday, the jobless claims report will highlight the employment sector. In last Thursday’s report, the Labor Department said the seasonally adjusted level of initial claims for state unemployment benefits was unchanged in the week ending October 25 at 479,000. The lull followed large swings that saw the level increase by 16,000 in the week ending October 18 following two weeks of declines totaling 36,000 following three weeks of increases totaling 54,000. The four-week moving average, which smoothes out some of the short-term volatility, declined by 5,000 to 475,500.

The claims level remains elevated. Any reading over 400,000 suggests that layoffs are outpacing hiring. Despite the tame readings in the last two weeks, the trend has been up. For the first forty-three weeks of the year so far, the average claims reading has been 395,814. For the same period last year, the average was 317,512.

The report said that continuing claims fell by 12,000 to 3.715 million in the week ending October 18 (continuing claims must be at least a week old). The decline was the first in six weeks. The four-week average rose by 28,000 to 3,709,500, the highest reading since May of 2003. For the first forty-two weeks of the year so far, the average continuing claims reading has been 3,134,167. For the same period last year, the average was 2,529,476.

The claims data was collected after the surveys for October’s employment report were conducted so the two reports have no direct correlation. But the claims report will act as a reminder that the monthly report is looming. Since forecast misses in the monthly jobs data have produced substantial reactions in the markets, some traders may be encouraged to take defensive positions. However, this may be more prevalent in the stock market as the outlook for the labor market is not bright in a contracting economy.

Also on Thursday is the preliminary report on productivity for the third quarter. In the final report for the second quarter, the Labor Department said that nonfarm business productivity (average output per worker per hour) rose at a 4.3% annualized rate. This was up from a 2.6% rate in the first quarter.

Because the advance report on gross domestic product indicated a 0.3% contraction in the third quarter, productivity is also expected to have been weaker. Analysts are predicting an increase of about 1.0%. This would be the weakest growth in three quarters and the growth may be chiefly attributed to the reductions in employment rolls.

On Friday, the major release of the day is the employment report. In September’s report, the Labor Department said that the seasonally adjusted level of nonfarm payrolls fell that month by 159,000. Not only was this a much larger decline than recent forecasts of 90,000 to 100,000, but it was the largest since March of 2003.

The weakness was broad-based, hitting both the goods producing and services sectors. While the payroll figure was weaker than anticipated, the unemployment rate, as expected, came in at 6.1%, matching August’s reading. However, it was still the highest since September of 2003. The unemployment rate is the percentage of those in the active workforce without jobs.

Analysts feel that October’s report will be bleak. They are predicting that payrolls fell by between 175,000 and 185,000. They are also predicting that the unemployment rate rose to 6.3%. If the employment rate prediction is true, it would be the highest since June of 2003.

A couple of minor releases also are slated for Friday. The report on pending home sales will provide some insight on upcoming sales activity. The report for August surprised observers by showing a substantial pickup in contract activity. The National Association of Realtors reported that its index of sales rose by 7.4%. The rise was corroborated in the latest report on existing home sales which also showed a surprising rise in September. Though the sector continues to struggle, the latest sales data suggests that falling home prices are generating increased buying interest.

Another second-tier release on Friday is the report on wholesale inventories for September. In August’s report, the Commerce Department said that the seasonally adjusted level of inventories rose by 0.8%. Though twice as large as analysts had predicted, latest gain was the weakest in five months.

Rising inventories can be seen as bullish if they are perceived as resulting from preparation for increased demand. But August’s report said that the level of sales fell in August by 1.0%. This was the largest decline since January of 2007 and July’s previously reported decline of 0.3% was revised to a decline of 0.8%.

The monthly changes resulted in an inventory-to-sales (I/S) ratio for August of 1.10 and July’s previously reported 1.07 ratio was revised up to 1.08. The I/S ratio is the value of stocks on hand at the end of a month divided by the value of sales for the month. It indicates how many months it would take to entirely deplete existing inventory at the prevailing sales pace. Rising turnover times mean increasing pressure to replace supplies. The ratio is still low by historical standards, however. June’s 1.06 reading was a record low.

For September, the inventory level is expected to make another small increase but the sale level is expected to have declined again.

The wholesale inventory data is dated. The report is also considered second-tier since it provides only one piece of the inventories picture. A more comprehensive report — including the manufacturing, wholesale, and retail sectors — will be released on the 14th.