Factory orders decline steeply
U.S. factory orders in January suffered the steepest drop in six years and an index of home sales fell, according to data Tuesday, highlighting weak spots in the economy that could derail its recovery.
Separately, fourth-quarter U.S. worker productivity was revised sharply lower and unit labor costs soared, suggesting inflation pressure that might make the Federal Reserve wary of cutting interest rates despite worries about growth.
The Commerce Department said U.S. factory orders fell 5.6% in January and that durable goods orders were revised to an even steeper 8.7% decline, compared with the 7.8% retreat announced last week.
“The orders report ... suggests that there is a significant loss of confidence in companies regarding new investments,” said Cary Leahey at Decision Economics in New York.
Nondefense capital goods spending excluding aircraft, seen as a good indicator of business investment, slumped 6.3% in January for the deepest decline in three years.
Worry that weakness in manufacturing and housing could spill into the wider U.S. economy was among the factors that spooked equity investors last week and sent markets tumbling.
The Fed expects both of those sectors to recover this year, helping lift growth gradually from a tepid 2.2% fourth-quarter pace, and had seen early signs that housing was stabilizing.
Pending sales of previously owned homes fell a steeper-than-expected 4.1% in January, according to the National Assn. of Realtors, although some analysts thought this might be related to cold weather in some U.S. regions.
“All home sales slowed in January with the return of cold winter weather,” said Christopher Low at FTN Financial.
The Labor Department said nonfarm business productivity slowed sharply to a 1.6% annualized pace in the fourth quarter from the 3% previously reported. That trimmed productivity gains for 2006 as a whole to 1.6%, the weakest rise since a matching pace set in 1997.
The slippage also sent unit labor costs, a gauge of inflation and profit pressure watched closely by the Fed, up by a hefty 6.6% annualized rate in the fourth quarter.
For the year, unit labor costs rose 3.2%, the largest gain since 2000.
“This data will likely continue to keep the Fed focused on the risks of rising inflation,” economists at Lehman Bros. wrote in a note to clients. “Labor costs make up close to 70% of total firm costs.”
On the other hand, some said the fourth-quarter unit labor cost rise might have been skewed by bonus payments. They forecast a slowing in labor cost gains in the current quarter.
“It’s not friendly to see unit labor cost jumping like this,” said Keith Hembre at FAF Advisors in Minneapolis. “But it is profit-based compensation rather than hourly labor costs. You have a lot of noise based on the variability with the bonuses and profit-based compensations.”
