Service Industries Rebound

MBA (3/6/2008 ) Velz, Orawin
The nation’s activity in the service industries improved, according to the Institute for Supply Management (ISM) nonmanufacturing survey. The nonmanufacturing index rose to 49.3 in February from 44.6 in January.
This is the second consecutive month that the index showed a reading below 50, indicating a contracting service sector. The pace of decline moderated, however, as the index recovered slightly more than half of the drop in January. Last month’s ISM nonmanufacturing survey sparked recession concerns when the index plunged 8.6 points in January to a reading below 50 for the first time since March 2003.

A separate report showed that factory orders fell 2.5 percent in January, following a 2.0 percent increase in December. Durable goods orders dropped 5.1 percent, a small upward revision from the initially reported decline of 5.3 percent released last week. Nondurable goods orders edged up 0.3 percent.

On Monday, the ISM manufacturing survey showed a contracting manufacturing sector in February, with the manufacturing index dropping to the lowest level since April 2003. Both the ISM manufacturing survey and the factory orders report indicated that the manufacturing industry is slowly losing momentum in the current quarter.

Another report showed that workers’ productivity held up quite well in the fourth quarter despite an anemic economic growth. Nonfarm productivity, a measure of output per hour, increased 1.9 percent (annualized rate) in the fourth quarter, upwardly revised from an initial report of 1.8 percent. The upward revision was due entirely to a decline in hours worked of 1.6 percent, the biggest drop since the first quarter of 2003.

The productivity report showed that unit labor costs—a gauge of inflationary pressures from compensation—rose 2.6 percent in the fourth quarter, revised up from 2.1 percent. However, unit labor costs in the third quarter were revised downward to 3.4 percent from 4.0 percent. That downward revision helped keep the year-over-year gain in unit labor costs in the fourth quarter to only 0.9 percent, the smallest since the second quarter of 2004.

The report includes revisions to productivity growth back to the first quarter of 2006. For all of 2007, productivity growth was revised upward to 1.8 percent from 1.6 percent, accelerating from 1.0 percent in 2006.

Finally, the Federal Reserve Board released the Beige Book, a summary of economic activity from the 12 Federal Reserve districts during January and the first half of February. The report showed that economic growth has slowed in eight of 12 bank districts, hurt by soft retail sales and manufacturing activity and a continued decline in housing. The rest of the districts reported subdued or modest growth. All districts reported price pressures but mainly for food and energy-related input costs. Wage and salary pressures were modest, as the labor markets slowed.

For residential real estate markets, most districts reported weaker sales and price declines with the exception of the Manhattan condo market, where prices rose by 5 percent from a year ago. Nonresidential real estate markets were generally softer compared to the report across the board. Demand for loans was mixed across districts, with nearly half reporting that lower mortgage interest rates had spurred an uptick in refinancing activity. Several districts reported an erosion in credit quality with rising mortgage and nonmortgage delinquency rates.

Treasury yields rose following the better-than-expected ISM report. The yield on 10-year Treasuries hovered around 3.69 percent by mid-Wednesday afternoon.

(Orawin Velz is senior director of economics and research with the Mortgage Bankers Association. She can be reached at ovelz@mortgagebankers.org.)