Manufacturing sector slumps
New orders for manufacturers' durable goods gained 2.2 percent in December - in sharp contrast to the 1.5 percent drop predicted by economists. But don't get excited yet about a rebound in manufacturing activity. Increases in new orders in November and December weren't large enough to offset an October drop. As a result, total new orders declined at a 9.7 percent rate in the fourth quarter after decreasing at a 13.2 percent rate in the third quarter. December orders were boosted by the highly volatile aircraft sector.

Nondefense capital goods surged at an 11.6 percent rate in the fourth quarter, again boosted by aircraft. But this wasn't enough to prevent nondefense capital goods orders from posting a drop in the fourth quarter, the first decline since the second quarter of 1999. New orders for primary metals have declined for three straight months, while new orders for industrial machinery and equipment have decreased for four straight months. Electronic and other electrical equipment did post two straight monthly gains, but not enough to offset a sharp drop in October. All in all, this was an anemic report and supports weakness in industrial production in coming months. The durable goods report will put pressure on Fed officials to be more, rather than less, aggressive in their easing policy next week.

Compensation moderates in fourth quarter, but accelerates for the year
The employment cost index rose 0.8 percent in the three months ended December 2000. This was an improvement over the previous three quarters in both wages and salaries as well as benefit costs. The figures were also lower than the consensus forecast and viewed in a favorable light by market players.

Wages and salaries peaked in the second quarter as the year over year change came in at 4.4 percent. It is only down to 4.1 percent, so it doesn't mean that wage costs have improved all that much in the second half of 2000. But it is worth noting that this quarterly measure shows somewhat less pressure than the monthly average hourly earnings data coming from the employment report. These figures are adjusted for occupation and overtime pay and thus are more reliable measures of change.

Benefit costs also moderated in the fourth quarter, posting a yearly gain of 4.9 percent, down from the highs of 5.3 percent for the second and third quarters of the year. Typically, benefits are largely affected by health insurance costs. While these figures are seasonally adjusted, it is worth noting that health insurance costs tend to post larger gains in the first quarter of the year. It will be interesting to see if these hold with the release of the March 2001 data in April.

It is always interesting to see how economic indicators measure up at year-end. A fourth-to-fourth quarter look at the employment cost index back to 1995 shows compensation costs have indeed risen in 2000 relative to the previous year. If the pattern seen in the quarterly chart holds, however, it is possible that the employment costs index for the fourth quarter of 2001 will be down from this past year.

Housing activity softens, but remains at high levels
Sales of existing single-family homes plunged 7.4 percent in December and were 5.3 percent lower than a year earlier. But it is important to keep in mind that extreme weather conditions for a good portion of the country held sales in check. Indeed, the largest sales declines in December were in the Northeast and the Midwest, regions hit by snowstorms and extreme cold.

Look closely at the housing chart. While home sales clearly peaked early in 1999, there is no question that overall housing activity has remained remarkably strong in the aftermath of a booming period. No doubt the drop in mortgage rates helped boost home sales by keeping monthly mortgage payments low. This will help maintain a steady flow of retail spending for consumer durables such as furniture, appliances and home furnishings in coming months, albeit not at the pace seen in 1999.