Factory Orders, ISM Index, Productivity and Costs

February 12, 2008--In December, factory orders rose 2.3%, led by a surge in durable goods orders. The outlook for growth in the service sector appears weak, as the ISM Nonmanufacturing Index fell to 44.6%. Finally, nonfarm business productivity posted a better-than-expected gain of 1.8% (SAAR) in the 4th quarter.

 

Factory Orders
As expected, factory orders rose 2.3% in December, up from a 1.7% increase in November. The increase was caused by a 5% jump in orders for durable goods. Orders for core capital goods, which are a proxy for business investment spending, surged 4.5%. Furthermore, shipments fell by 0.3%, while inventories increased 0.8%. Last, unfilled orders grew 2.5% for the month.

 

ISM Nonmanufacturing Index
In January, the composite nonmanufacturing index contracted to 44.6%. For the first time in
58 months, the business activity index declined, and now stands at 41.9%. The contracting of the index indicates the service sector is shrinking. At 43.9%, the employment index decreased by
7.9 percentage points over the month, further suggesting a weak service sector. Service sector growth can be expected to weaken over the near-term, as forward-looking indicators posted a decline as well.

 

Productivity and Costs
Nonfarm business productivity increased 1.8% (SAAR) in the 4th quarter. That figure, though better than expected, didn't come close to the 6.0% productivity increase in the third quarter. After its largest decline in four years, unit labor costs rose 2.6%, beating expectations. However, on a year-ago basis, unit labor costs are up 1%. The encouraging numbers in the 4th quarter are most likely temporary as slow economic growth going forward is projected.