- The Washington Times - Tuesday, December 5, 2006

From combined dispatches

Economic growth in the vast service sector picked up last month, while productivity growth and labor costs performed better this summer than earlier estimated, according to economic reports out yesterday.

Activity in services accelerated in November, indicating that the economy was able to shake off the effects of a deep housing slump more easily than many economists expected, according to a report from the Institute for Supply Management.

The rise in the institute’s service index to 58.9 from 57.1 in October contrasted with a fall into recession territory in the organization’s closely watched manufacturing index reported on Friday, and provided a positive offset to a spate of weak economic news last week.

“The reports of the economy’s demise may have been premature,” said Joel Naroff, president of Naroff Economic Advisors. “It still does not look as if the problems in housing and motor vehicles have spread into the general economy.”

Many economists had expected the services index to decline to 55.5. Readings above 50 indicate an expansion in industries such as retailing, banking and construction.

In a reminder that manufacturing remains a question mark, the Commerce Department reported yesterday that orders to U.S. factories plunged 4.7 percent in October, the third decline in the past four months, and the biggest drop in more than six years. The manufacturing sector is experiencing the fallout from this year’s slowdown in the overall economy and slumps in auto sales and home construction.

“The overall economy is nowhere near as weak as the manufacturing sector,” said John Ryding, chief U.S. economist at Bear Stearns Cos. “It is worth noting that this index is not just a services index, but also includes construction. The improvement in conditions, therefore, took place despite pressures on residential construction and sales.”

On another upbeat note, growth in worker productivity was better than previously reported, growing at a 0.2 percent pace rather than staying flat in the third quarter, according to the Labor Department.

Labor costs, including wages and benefits, were lower during the quarter — rising 2.3 percent rather than 3.8 percent, as earlier reported, the department said.

While rising wages are good news for workers, the increases could fuel unwanted inflation when they outstrip the growth in productivity, or the output per hour of work.

Economists said the productivity news is likely to ease inflation worries at the Federal Reserve, where officials had cited the Labor Department’s earlier reading showing a big jump in labor costs as a reason the Fed must be vigilant against inflation.

“Based on these numbers, the Fed can rest easy about the threat of inflation,” said Nariman Behravesh, chief economist at Global Insight, a private forecasting firm. “The only debate now seems to be about when the Fed will cut” interest rates.

If inflation remains benign and the overall economy continues to show weakness, the central bank might move as soon as March to start cutting rates, he said.

Despite frequently voiced concerns about stubborn inflation pressures, the Fed paused in its two-year rate-raising campaign in August and has left rates unchanged since then. Most analysts expect the Fed to stay on hold at a meeting of its rate-setting committee next week. Speculation in the financial markets has centered on whether the Fed will have a change of heart and start cutting rates early next year.

The hope that yesterday’s better inflation news will help quell the Fed’s concerns combined with the unexpectedly strong reading on the service economy to spark a rally on Wall Street yesterday. The Dow Jones industrial average rose 47.75 points to 12,332.

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