While the economic data released over this past week did not show an economy about to spiral into a significant downturn, the news was not good. The newest information on productivity, new manufacturing orders and employment all posted some disappointing news that collectively should be a concern about the economy going forward.
First. Productivity. Due to a downward revision in output, labor productivity increased by just 1.6 percent in the 4th quarter. This marks the 3rd consecutive quarter of sub-par gains in efficiency in the overall non-farm business sector. For the year overall, productivity growth increased just 1.4 percent — the slowest annual pace since 1995. At the same time, hourly compensation rose by 4.9 percent. As a result, unit labor costs, the foundation for underlying inflation, increased by 3.4 percent in 2006. This is the largest increase in 6 years. This is an ominous signal, that if it continues, could indicate that inflationary concerns could be on the rise going forward.
On the positive side, manufacturing productivity remains strong. Over the course of the past 4 quarters, manufacturing productivity growth increased a solid 4 percent — marginally below the 4.4 percent average pace over the past 5 years. At the same time, hourly compensation increased by 3.5 percent last year. As a result, unit labor costs in manufacturing edged down by 0.5 percent last year, signaling that labor costs are being contained within manufacturing.
Second. Manufacturing Orders. New manufacturing orders fell by 5.6 percent in January — the largest monthly decline since July 2000. While nondurable orders fell by 2 percent, durable orders plummeted by 8.7 percent in January. Construction machinery orders fell by 41 percent, turbine generators and power transmission equipment orders fell by 21 percent and transportation equipment orders fell by 19 percent. Together, these large declines signal that a slowdown in capital investment may be in the making.
Third. Employment. The Labor Department reported that 97,000 jobs were added in February, the smallest monthly rise since November, 2004. Employment in goods-producing sectors fell by 71,000 jobs last month, 90 percent in construction, the largest single monthly drop since July, 2003. The housing slump continues to weigh on the manufacturing sector, as jobs in wood products accounted for nearly a third of the 14,000 manufacturing jobs lost in February.
On a positive note, average hourly earnings accelerated by 0.4 percent in February and workers wages are up 4.1 percent over the past year. The tightening labor market is driving up wages. This should offset some of the negative wealth effects from the ongoing housing correction and shore up consumer spending in the coming year.
Coming up this week, retail sales, consumer sentiment and industrial production will give an update on the state of the consumer and industry. Stay tuned.
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