Productivity jumps
Nonfarm business productivity surged at a 3.5 percent rate in the fourth quarter after increasing at a moderate 1.1 percent pace in the third quarter. Quarterly changes in nonfarm productivity are affected by changes in real GDP and employment. Remember that nonfarm payrolls fell sharply in the fourth quarter but real GDP managed to eke out a tiny gain, meaning that workers were highly productive in the final quarter of the year relative to the previous quarter. Fourth quarter productivity figures relative to a year earlier show a rise of 1.6 percent, less stellar but still more than the two prior quarters. Some of the improvement came from the manufacturing sector, where productivity gained in the second half of the year after declining in the first half.

Unit labor costs declined at a 1.1 percent rate in the fourth quarter after posting relatively large gains in the previous four quarters. It isn't unusual to see declines in unit labor costs when nonfarm productivity posts healthy gains. As indicated above, quarterly changes tend to be more volatile than year-over-year changes. On a year-over-year basis, unit labor costs rose 2.2 percent, but this was still half as fast as the gain posted in the third quarter. Slower gains in labor costs coupled with improved productivity suggests that inflationary pressures are not in the pipeline. This will allow the Fed to keep monetary policy on hold to insure that the economic recovery takes root.

Consumer credit drops on soggy holiday sales
Consumer installment credit declined $5.1 billion in December after surging $20.1 billion in November. While the bulk of the gain in motor vehicle sales occurred in October, the bulk of the consumer credit gains took place in November due to the typical 3-4 week lag needed to put an auto loan in place. In December, auto sales dropped off more sharply than in November, so consequently, consumer credit was not likely to expand as much. However, the bulk of the drop in consumer credit actually came from revolving credit (such as purchases made on retail sales). Remember that December retail sales were anemic this year relative to the gains of the past few years. This helped dampen the demand for credit expansion.

Turning point for factory orders
Factory orders rose 1.2 percent in December, offsetting only one-fourth of November's 4.3 percent drop. Nondefense capital goods orders rose for the third straight month, although these gains have yet to offset the sharp falloff in August and September. Nevertheless, these modest improvements are pointed in the right direction for a recovery in capital sending, albeit meager at this point. Indeed, on a quarterly basis, the chart below shows that nondefense orders actually declined from the previous quarter. Actually, the pattern has been pretty pathetic over the past year. But it looks as though the worst is over.

New orders for information technology equipment have posted stronger gains in the past few months and December levels are on par with August. This helped to boost new orders for the first time in a year. It will be useful to have a couple more months of data to confirm that the manufacturing sector is finally turning the corner and that we may soon see increases in industrial production (although perhaps not for the month of January, which is expected to decline). The improvement in factory orders comes at the same time as the recent gains in the ISM manufacturing index. While the total index hasn't quite achieved the turning-point level of 50 percent (it rose to 49.9 percent in January), several components such as new orders and production did punch through 50. We are seeing signs of recovery lately.

Plateau in the non-manufacturing economy
The ISM non-manufacturing index (formerly non-manufacturing NAPM survey) edged down to 49.6 in January from a level of 50.1 in December. The index level is hovering around the 50 percent mark that signifies economic growth. Current levels, though consistent with fairly soggy growth, are roughly back where they were in the first quarter of 2001. While this index is not accelerating rapidly, it seems to have reached bottom and started to climb back up.