- The Washington Times - Thursday, June 2, 2005

Orders to U.S. factories advanced by 0.9 percent in April, the fastest clip in five months, and worker productivity at the start of the year turned out to have been better than originally thought.

The nation’s retailers also reported better-than-expected sales in May, but all the economic news released yesterday wasn’t good. Labor costs, a key factor influencing inflation rates, were up sharply for the past six months.

The Commerce Department said factory orders rose in April as demand for durable goods posted a solid 1.9 percent gain, the first increase in four months, led by strength in demand for autos and aircraft. Those gains offset a 0.2 percent decline in orders for nondurable goods, items not expected to last three years.

Meanwhile, the Labor Department reported that productivity went up at an annual rate of 2.9 percent in the first quarter, revised upward from an originally reported 2.6 percent. However, the cost of labor per unit of output jumped at an annual rate of 3.3 percent. That followed a revised increase of 7.7 percent in labor costs in the fourth quarter, which was the biggest surge in more than four years.

“This is seriously bad news for the Fed — costs appear to be spiraling rapidly — and it strongly argues for substantially higher interest rates,” said Ian Shepherdson, chief U.S. economist at High Frequency Economics.

But other analysts were not as concerned, noting that the big fourth-quarter surge reflected end-of-the-year bonuses that should not trigger widespread wage pressures.

“The one-time nature of the payouts suggests that there is little inflationary implication from these numbers,” said Merrill Lynch economist Sheryl King.

In other economic news yesterday, the nation’s retailers reported generally upbeat sales figures for May with luxury stores such as Nordstrom Inc. and teen retailers, including Bebe Stores Inc., among the big winners.

And in a final report, the Labor Department said the number of Americans filing new claims for unemployment benefits shot up by 25,000 last week, the biggest weekly increase in 14 months. Labor Department analysts blamed the increase, which pushed total claims to 350,000 last week, on temporary layoffs in the auto industry.

Wall Street had a muted reaction to all the economic news. The Dow Jones Industrial Average finished the day up 3.62 points at 10,553.49.

While the jump in jobless claims was the biggest one-week gain since late January 2004, analysts noted the temporary nature of the auto layoffs and said they were still looking for solid gains in employment going forward.

They predicted today’s jobless report would show the unemployment rate holding steady at 5.2 percent with a solid 180,000 new jobs created last month.

The report on factory orders showed no change in the overall increase for durable goods from an original estimate last week of a rise of 1.9 percent. The 0.2 percent drop in nondurable goods followed a huge 3 percent rise in March and a 1 percent decline in February.

The government’s new report on productivity and unit labor costs reflected major alterations to previous data that had showed unit labor costs rising at a much more measured pace.

The 7.7 percent jump in labor costs in the fourth quarter was the fastest quarterly gain since an 8.9 percent surge in the third quarter of 2000. It had earlier been reported as a more modest 1.7 percent increase.

Labor Department analysts said the sharp upward revision occurred because of revised data showing bigger bonus payments than originally thought.

The third-quarter performance of unit labor costs was revised to show a gain of 4.5 percent while the second-quarter gain last year was changed to an increase of 1.8 percent.

The increases were all above the small 0.8 percent rise for all of 2004 and the actual decline of 0.3 percent in 2003.

The upward revisions were certain to prompt the Federal Reserve to examine whether the economic recovery from the 2001 recession was beginning to trigger higher wage pressures that could spur unwanted inflation.

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