Factory orders rise in October

Jeannine Aversa

Wednesday, Dec. 4, 2002 | 9:54 a.m.

WASHINGTON -- Productivity, a crucial ingredient to the economy's long-term vitality, grew at a sizzling annual rate of 5.1 percent in the summer, a faster pace than the government previously thought. Orders to U.S. factories rose in October for the first time in the last three months.

The latest reading on productivity -- the amount of output per hour of work -- was even better than the 4 percent growth rate estimated for the third quarter a month ago and represented a considerable pickup from the 1.7 percent pace registered in the second quarter, the Labor Department reported today.

In another report the Commerce Department said factory orders went up 1.5 percent in October, after falling in both August and September. That provided a dose of good news for the nation's manufacturers, which have been trying to get through a late summer rough patch.

Big-ticket manufactured goods, including cars and household appliances, posted a 2.4 percent increase in October and "nondurable" goods, such as clothes and food, rose 0.6 percent.

Although the 1.5 percent advance in factory orders in October marked the first increase since July, the performance was slightly weaker than the 1.7 percent gain analysts were forecasting.

Still, the pair of reports suggested that the country, while struggling with a seesaw pattern of economic growth this year, will avoid falling into a new recession.

In the productivity report, the 5.1 percent growth rate marked the strongest pace since the first three months of this year and was a better showing than the 4.5 percent rate analysts were predicting.

Gains in productivity are helping to keep a lid on inflation, an important factor for Federal Reserve policy-makers as they try to energize the nation's economy through low interest rates.

Analysts were predicting productivity would be revised upward in the third quarter to reflect an economy that was growing faster during that period than the government first estimated.

The government reported last week that gross domestic product -- considered the best measure of the nation's economic health -- grew at a brisk 4 percent pace in the third quarter. That was stronger than the 3.1 percent growth rate first estimated.

But analysts are predicting the summer growth spurt will be followed by a winter lull. Analysts are forecasting a fourth-quarter economic growth rate of around just more than 1 percent.

Wanting to strengthen the economic recovery, the Federal Reserve last month cut a key interest rate by a bold half a percentage point to a 41-year low of 1.25 percent. It marked the first rate reduction of this year and the 12th since January 2001.

Many analysts believe the Fed will hold rates at that low level at its next meeting on Dec. 10.

Improved productivity is particularly important to companies as they try to cope with the uneven economic recovery and try to bolster profits, which took a big hit during last year's recession.

Gains in productivity also allow the economy to grow faster without triggering inflation and let companies pay workers more without raising prices, which would eat up those wage gains.

Hourly compensation in the third quarter rose at a brisk 4.9 percent rate, compared with a 3.9 percent pace in the second quarter. Adjusted for inflation, hourly compensation went up at a 3 percent pace in the third quarter, an improvement from the 0.5 percent growth rate in the previous quarter.

The growth rates for both compensation figures in the third quarter marked the biggest increases since the third quarter of 2000, suggesting that workers who have jobs are making gains.

The rise in third-quarter productivity helped to push down unit labor costs, good news for companies trying to control costs to boost profits. Unit labor costs fell at an annual rate of 0.2 percent in the third quarter, an improvement from the 2.2 percent growth rate in the second quarter.

For the 12 months ending September, productivity grew at a brisk 5.6 percent pace, representing the strongest showing since the first quarter of 1973.