Factory orders post unexpected rise

Thursday, December 6, 2007

WASHINGTON -- Orders to U.S. factories rose unexpectedly in October, although much of the gain reflected higher energy prices.

The Commerce Department reported that orders advanced by 0.5 percent in October, far better than the flat reading that was expected. However, much of the strength came from a big jump in the cost of petroleum and other energy prices, which pumped up orders at oil refineries and chemical plants. The orders figures are not adjusted for changes in prices.

Orders for nondurable goods such as petroleum products rose by 1.3 percent, helping to offset a 0.2 percent drop in demand for durable goods. The 0.5 percent overall rise in factory orders was the best showing since a 3.4 percent jump in July.

In other economic news, the Labor Department reported that worker productivity roared ahead at an annual rate of 6.3 percent this summer while wage pressures dropped sharply.

Meanwhile, a private sector report on labor market strength projected that business payrolls increased by 189,000 in November. That gain in the ADP report was well above the expectation for a modest gain of 50,000 jobs and caused economists to boost their forecasts for job growth in the government's employment report that will be released Friday.

Ian Shepherdson, chief U.S. economist at High Frequency Economics, said he now looked for the Labor Department to show a gain of 125,000 payroll jobs in November rather than the 50,000 gain he was forecasting before Wednesday's report.

Friday's unemployment report is being closely watched as an indication of whether the Federal Reserve will feel the need to cut interest rates for a third time to keep the economy out of a recession.

Investor hopes for a rate cut were given a boost last week by comments from Fed chairman Ben Bernanke and vice chairman Donald Kohn. Both men noted that the economy is likely to slow considerably in the current quarter under the impact of renewed turbulence in financial markets.

On Capitol Hill, Peter Orszag, director of the Congressional Budget Office, said Wednesday that "the risk of a recession is now elevated" due to troubles in housing, the credit markets and rising oil prices.

Wall Street investors took all the new data in stride, believing the Fed would still be inclined to cut interest rates for a third time next week. The Dow Jones industrial average jumped 196.23 points to close at 13,444.96.

While overall economic growth, as measured by the gross domestic product, roared ahead at a 4.9 percent rate in the third quarter, the fastest pace in four years, GDP is expected to slow to a barely discernible 1.5 percent or even less in the current quarter.

Growth at such a slow pace would increase the risk that the country could dip into a recession, felled by the multiple blows of a prolonged housing slump, a severe credit crunch, rising energy costs and faltering consumer confidence.

The 6.3 percent increase in productivity was a significant upward revision from an initial estimate a month ago of a 4.9 percent increase, reflecting the fact that total output was revised higher.

The jump in productivity was accompanied by a slowing in wage pressures. Unit labor costs fell at a 2 percent annual rate in the third quarter, the biggest decline in four years. Stronger productivity growth and fewer wage pressures should ease concerns at the Federal Reserve that inflation could get out of hand.

Rising wages are good for workers. But if higher wages are not accompanied by strong productivity gains, they raise concerns among Fed policymakers about inflation.

The 0.2 percent decline in orders for durable goods was revised from an even weaker estimate of a 0.4 percent drop that the government made last week. The weakness stemmed from widespread declines in a number of industries including autos, machinery and computers.

The Bush administration, seeking to limit the fallout from the housing bust, has been prodding the mortgage industry to freeze rates on some of the 2 million subprime mortgages that are due to reset to higher rates over the next two years.

The rate freeze program -- expected to be announced Thursday -- would be offered to homeowners who have been able to keep current with their monthly payments at the lower introductory rates but are judged to be unable to meet the sharply higher payments when the rates reset.

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