Factory Orders Dive Amid Broad Declines

Devon Runyon of Omaha admires a John Deere lawn tractor at the Council Bluffs Home Show at Mid-America Center, in Council Bluffs, Iowa, Saturday, March 3, 2007. Orders to U.S. factories fell by the largest amount in 6¿ years in January, reflecting widespread declines across a number of industries. The Commerce Department reported that total orders dropped by 5.6 percent in January, the biggest decline since July 2000, a period when the economy was slowing sharply in advance of an actual recession which began in 2001. (AP Photo/Nati Harnik) (Nati Harnik - AP)

The weaker productivity number reflected the big downward revision announced last week in total economic growth, as measured by the gross domestic product. The GDP expanded at a sluggish 2.2 percent annual rate from October through December, not the 3.5 percent growth rate originally reported.

With less output and the number of hours worked remaining the same, productivity for the quarter looked worse. The drop in output also meant that unit labor costs were higher.

It was the biggest quarterly increase in labor costs since a 9.1 percent surge in the first three months of 2006. Both gains were attributed in large part to big bonuses paid to high-income workers.

Analysts said this report would certainly attract attention at the Fed and would add to the view that even with the economy slowing, policymakers cannot consider cutting interest rates.

"Three sluggish quarters of economic growth should have created an environment for an ease, but with cost pressures rising, inflation concerns have to remain high," said Joel Naroff, chief economist at Naroff Economic Advisors, a private forecasting firm.

Many economists believe the Fed will leave rates unchanged when they next meet on March 20-21 and could leave rates alone for the rest of the year. The Fed's last move was a 17th consecutive increase in the federal funds rate last June.

Productivity is the key element needed for rising living standards. It allows businesses to pay workers with the wage gains financed by the increased output. Without productivity gains, businesses often have to resort to boosting the cost of their products to finance wage gains, a process that increases inflation.

Beginning in 1973, productivity slowed dramatically as the country went through a period of high inflation, triggered by a series of oil shocks. However, productivity started to show much better gains in the mid-1990s as the economy benefited from increasing use of computers.

For all of 2006, productivity rose by 1.6 percent, the slowest annual increase in nine years.

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On the Net:

Productivity report: http://www.bls.gov/lpc

Factory orders: http://www.census.gov/m3