Productivity/Unit Labor Costs Above Estimates, Factory Orders Decline for First Time in 5 Months, Service Sector Bounces Back

- Final 4Q Non-farm Productivity rose 1.9% versus estimates of a 1.8% gain and prior estimates of a 1.8% increase.

- Final 4Q Unit Labor Costs rose 2.6% versus estimates of a 2.1% gain and prior estimates of a 2.1% increase.

- Factory Orders for January fell 2.5% versus estimates of a 2.5% decline and a 2.0% increase in December.

- ISM Non-Manufacturing for February rose to 49.3 versus estimates of 47.3 and 44.6 in January.

BOTTOM LINE: Productivity in the US grew faster than the economy in the fourth quarter, Bloomberg reported. For all of 2007, productivity rose 1.8% versus a 1.0% gain the prior year. Productivity at non-financial corporations, which is reported with a one quarter lag and a gauge closely watched by Greenspan, rose 2.9% in the third quarter. I continue to expect productivity to remain above long-term average rates and unit labor cost increases, which make up two-thirds of the costs of goods and services, to remain subdued over the intermediate-term.

A gauge of the health of the service sector came in above estimates, Bloomberg reported. The Employment component of the index rose to 46.9 versus 43.9 the prior month. The New Orders component of the index rose to 49.6 from 43.5 the prior month. The Prices Paid component fell to 67.9 from 70.7 in January. I expect this gauge to move back above 50.0 over the next few months on pent-up demand as the stimulus hits, which will indicate expansion.

Orders to US factories fell in January for the first time in five months, Bloomberg reported. Excluding orders for transportation equipment, demand fell .4%. Orders for non-durable goods actually rose .3% versus a .4% decline in December. Orders for military gear fell 20%. Demand for automobiles fell 1.7% versus a 4.4% decline in December. Manufacturers had enough goods on hand to last 1.24 months, the same as December. According to Intrade.com, the odds the US slips into recession this year have fallen to 60.2% from 77.5% in January. Given today's better economic data and the sharp rise in commodities, the odds for a 75 basis point rate cut at the upcoming March meeting are falling to 50.0% today from 78.0% yesterday. Factory Orders should bounce back in February on inventory rebuilding.