Productivity Soars, Unit Labor Costs Fall, Jobless Claims Fall, Factory Orders Decline, Service Sector Strong, Pending Home Sales Fall from Record

- Preliminary 3Q Non-farm Productivity rose 4.1% versus estimates of a 2.6% rise and an upwardly revised 2.1% gain in 2Q.
- Preliminary 3Q Unit Labor Costs fell .5% versus estimates of a 1.8% increase and a downwardly revised 1.8% gain in 2Q.
- Initial Jobless Claims for last week fell to 323K versus estimates of 330K and 331K the prior week.
- Continuing Claims fell to 2823K versus estimates of 2898K and 2867K prior.
- Factory Orders for September fell 1.7% versus estimates of a 1.0% decline and a 2.9% increase in August.
- ISM Non-Manufacturing for October rose to 60.0 versus estimates of 57.0 and a reading of 53.3.
- Pending Home Sales for September fell .3% versus estimates of a 1.8% decline and a

BOTTOM LINE: The productivity of US workers rose more than forecast last quarter and labor costs unexpectedly declined as business concentrated on improving efficiency to combat soaring fuel prices, Bloomberg said. The decline in labor costs, which comprise two-thirds of inflation, was the first decrease since the second quarter of 2004. The 6% decline in the CRB Index and decelerating unit labor cost increases bode very well for muted inflation readings going forward.

The number of first-time jobless claims unexpectedly declined last week to a two-month low because of fewer hurricane-related filings, Bloomberg reported. The four-week moving average of jobless claims decreased to 350,500 from 367,500 the prior week. The four-week moving average of continuing claims fell to 2.85M from 2.86M prior. The insured employment rate, which tracks the US unemployment rate, stayed at 2.2%. I expect tomorrow’s non-farm payroll report to exceed estimates of 110,000 new jobs created.

Orders placed with US factories fell 1.7% in September, as bookings for aircraft, computers and household appliances dropped after the hurricanes hit, Bloomberg reported. Considering August’s strong gains and the effects of the hurricanes this number is not surprising. I expect Factory Orders for October to bounce sharply.

US service companies expanded more than economists expected in October as some hurricane-stricken businesses along the Gulf Coast reopened and energy prices retreated from record levels, Bloomberg reported. The prices paid component of the index fell to 78 from 81.4 in October. As well, the new orders component of the index rose to 58.2 from 56.6 in September. I expect this gauge of the service sector to remain strong as consumer sentiment rises over the next few months.

Contracts to purchase previously owned US homes fell in September from an all-time record as rising borrowing costs and the effects of the hurricanes deterred some prospective buyers. I continue to believe the housing market is slowing to more healthy sustainable levels.