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1. Productivity Slows, Labor Costs Edge Down
2. Manufacturing Woes Persist: Durable Orders Tank
3. Service Economy Stronger Than Expected
4. Report: China to Increase Gold Buying
1. Productivity Slows, Labor Costs Edge Down
The productivity of the American worker slowed to a crawl in the third quarter
of 2006, but labor costs, which are an inflation indicator, rose less than
previously reported.
Productivity grew at an annual rate of 0.2 percent in the third quarter compared
to a 1.2 percent increase in the second quarter. The third quarter's dismal
output was the weakest since the fourth quarter of 2005 when Hurricanes Katrina
and Rita battered the economy.
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Productivity measures the output of goods by workers. Increasing productivity
leads to higher living standards because companies can afford to pay workers
more for additional output.
However, if labor costs outpace the rise in productivity, it forces companies to
either raise prices on their products or face slimmer profit margins. And that's
pretty much what's happening right now.
Unit labor costs, the expense of wages and benefits per unit of output, shot up
2.3 percent in the third quarter. That was less than the 3.8 percent gain
reported in the preliminary figures a month ago, but is a 180-degree reversal
from the 2.4 percent decline in costs posted in the second quarter.
Labor costs have a direct impact on inflation if companies decide to pass on the
higher costs to customers. And that has implications for the Fed when it next
meets in December.
The fact that productivity is still increasing and labor costs weren't as bad as
expected should give the Fed some breathing room when it comes to its impending
rate decision. But don't expect the Fed to cut rates based on these numbers.
Sure, inflation could've been worse, but it's still not good.
Editor's Note:
2. Manufacturing Woes Persist: Durable Orders Tank
New orders at U.S. factories fell 4.7 percent in October, the biggest fall in
more than six years and marking the third drop in four months, while inventories
rose again suggesting growing slack in the economy, a government report said on
Tuesday.
Market analysts surveyed by Reuters had forecast an average fall of 4 percent.
October's decline was the biggest drop since an 8.6 percent fall in July 2000.
Excluding transportation, factory orders fell just 0.8 percent.
Orders in September bucked the downtrend, rising a revised 1.7 percent from the
preliminary 2.1 percent gain, the Commerce Department said.
Manufacturing shipments inched up 0.1 percent, the second gain in three months,
while unfilled orders rose 1.2 percent for the 17th increase in the last 18
months.
Inventories rose 0.4 percent, up for 12 of the last 13 months. The
inventory-to-shipment ratio, a measure of how many months it would take to
exhaust stores of goods, remained unchanged from September at 1.23, the
government said.
The indications of an easing economy come on the heels of a report earlier on
Tuesday showing weaker-than-expected third-quarter productivity growth of 0.2
percent that was construed by market analysts as taking pressure off the Federal
Reserve to raise rates next week.
The Federal Reserve Board has warned it must remain vigilant on inflation
although it halted a two-year rate-hiking campaign in August with its benchmark
fed funds rate at 5.25 percent. The U.S. central bank's next rate-setting
meeting is set for December 12.
© 2006 Reuters.
Editor's Note:
3. Service Economy Stronger Than Expected
The pace of growth in the U.S. service sector accelerated unexpectedly in
November, while employment, prices paid and new orders also rose, according to a
report on Tuesday.
The Institute for Supply Management's services index rose to 58.9 in November
from 57.1 in October. The median forecast of Wall Street economists was for a
decline to 56.0.
A number above 50 indicates growth in the sector and the potential for a fall
below that level was a particular focus of financial markets in this month's
report after last week's ISM manufacturing index posted its first sub-50 reading
in 3-1/2 years.
Treasury bond prices slipped after the stronger-than-expected services index.
Benchmark 10-year notes traded 8/32 lower in price for a yield of 4.46 percent
after the survey was released.
"We're still seeing good growth on the service side of the economy.
Manufacturing may be soft, but the economy as a whole still has good underlying
strength, especially in the service sector," said Gary Thayer, chief economist
at A.G. Edwards and Sons in St. Louis, Missouri.
"The Fed's view that the economy is still healthy seems appropriate. The bond
market sold off a bit on the news. It doesn't look as if the economy is
faltering as the manufacturing index suggested last week."
The services sector makes up about 80 percent of U.S. economy activity,
including businesses like restaurants, hotels, hair salons, banks and airlines.
The survey's prices-paid index posted a reading of 55.6 in November versus 51.9
in October, while the employment component came in at 51.6 from 51.0. New orders
were at 57.1 from 56.5.
© 2006 Reuters.
Editor's Note:
4. Report: China to Increase Gold Buying
China will consume a record 350 tons of gold this year amid surging sales of
gold bullion, up 17 percent from 2005, the official Xinhua News Agency reported
Tuesday.
Gold output in China is likely to top 240 tons this year, with industry profits
exceeding 5.5 billion yuan (US$700 million; euro526 million), the report said,
citing the chairman of the China Gold Association, Cheng Fumin.
China is the world's third-biggest consumer of gold after India and the United
States. Gold use in 2005 exceeded 300 tons, 80 percent of which went to the
jewelry industry, the report said.
Cheng said that surging gold prices had dented jewelry sales but were boosting
purchases of bullion.
Gold prices surged to a record US$725 an ounce in May but have since fallen back
to about US$650 an ounce.
Some economists have been lobbying for China to invest more of its foreign
exchange reserves, now thought to top a record US$1 trillion, in gold to hedge
against a weaker U.S. dollar. Much of China's reserves are in dollar-denominated
Treasuries.
"If China adopts a long-term strategic approach, accurately predicts the market
price of gold and purchases gold in a timely and reasonable manner, it can
preserve and increase the value of gold," and improve the structure of its
reserves, Gao Jie, a professor at the University of International Business and
Economics, wrote in a commentary in the online edition of the People's Daily, a
Communist Party newspaper.
According to the World Gold Council, China has 600 tons of gold holdings,
equivalent to about 19.3 million ounces. Gold accounts for less than 1.3 percent
of the country's foreign reserves, according to Gao.
© 2006 Associated Press.
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