Unit Labor Costs Decelerate, Factory Orders Fall, ISM Non-Manufacturing Very Healthy

- Final 3Q Non-farm Productivity rose .2% versus estimates of a .5% gain and prior estimates of unch.
- Final 3Q Unit Labor Costs rose 2.3% versus estimates of a 3.2% gain and prior estimates of a 3.8% increase.
- Factory Orders for October fell 4.7% versus estimates of a 4.2% decline and a downwardly revised 1.7% increase in September.
- ISM Non-Manufacturing for November rose to 58.9 versus estimates of 55.5 and a reading of 57.1 in October.

BOTTOM LINE: Worker productivity grew at the slowest pace of the year last quarter while labor costs were revised down more than expected, easing concern that surging incomes will stoke inflation, Bloomberg said. The smaller increases in unit labor costs are a result of recent income revisions. Wages and salaries rose 4.5% for the third quarter versus prior estimates of a 4.8% gain. Wages and salaries are still rising more than three times the Consumer Price Index’s recent rise of 1.3%(yoy). Challenger, Gray & Christmas announced this morning that job cuts by US employers plunged 23% in November from the same time last year. I continue to believe the labor market will remain healthy without generating substantial unit labor cost increases over the intermediate-term.

Orders placed with US factories fell in October, Bloomberg reported. Construction machinery bookings slumped 12% for the month. Orders for electrical equipment and appliances rose 4.7%. Orders for capital goods excluding aircraft and military equipment, a gauge of future business investment, fell 4.9% versus a 3.1% gain in September. The inventory-to-shipments ratio held steady at 1.23 months. I still expect manufacturing to begin heading back to around average levels as auto production cutbacks subside, consumer spending remains healthy and housing stabilizes at relatively high levels.

Growth at US service industries unexpectedly accelerated for a second month in November as lower energy prices and a strong job market spurred consumer spending, Bloomberg said. Consumers, buoyed by the decline in gas prices and the lowest unemployment rate in five years, are boosting the US economy even as housing and auto production slow. The new orders component of the index rose to 57.1 from 56.5 the prior month. The prices paid component increased to 55.6 from 51.9 prior. The employment component of the index rose to 51.6 from 51 in October. The inventories component of the index fell to 51.5 from 53. Finally, the backlogs component rose to 54.5 from 51.5. Retail sales are vigorous so far this holiday shopping season, according to the Intl. Council of Shopping Centers, which said today that sales at stores open at least a year rose 3.1% during the week ended Dec. 2. The service sector accounts for the vast majority of growth in the US economy, while manufacturing accounts for only 12%. This report should quell any talk of an imminent recession. I continue to expect holiday retail sales to exceed estimates and the service sector to remain very healthy over the intermediate-term.