NEW YORK (CNNfn) - Factory orders rose more than expected in July, but a productivity boom that has powered the U.S. economy of late was less impressive in the second quarter than first thought -- with labor costs rising at a faster rate, the government reported Thursday.
Though the productivity numbers are a key gauge used by the Federal Reserve to measure inflationary pressures, economists said Thursday's revised numbers aren't likely to figure significantly in the Fed's thinking when it comes to deciding whether to raise interest rates for a third time this year. That's because the quarterly numbers are volatile and thus less important than the year-to-year comparisons.
"Productivity numbers on a quarter-to-quarter basis are very volatile. The downwardly revised second-quarter numbers could easily be revised upward in the third quarter," said A.G. Edwards' chief economist Gary Thayer.
The U.S. markets, meanwhile, were roiled by interest rate fears in the wake of a disappointing retail sales report and anticipation of an upcoming employment report Friday.
An already-soft bond market continued to tumble after the release of the economic data. The 30-year Treasury bond slipped 21/32 in price for a yield of 6.13 percent.
Labor costs outpace output
The Commerce Department said factory orders climbed 2.1 percent in July. Economists surveyed by Reuters expected a rise of 1.8 percent after an upwardly revised 0.8 percent gain in June.
Meanwhile, the Labor Department said non-farm productivity in the second quarter rose a revised 0.6 percent, its smallest increase since the second quarter of 1998. The figure was revised down from the initially reported gain of 1.3 percent and fell short of forecasts of a 0.8 percent rise.
Unit labor costs, an indicator of inflation pressure when they begin to keep pace with or even accelerate faster than output, rose a revised 4.5 percent, equaling their fastest rate since the first quarter of 1994. The indicator was originally reported as being up 3.8 percent; economists expected the increase to be 4.3 percent.
What the second-quarter slump in productivity will mean for interest rates is too soon to tell, according to leading economists.
"These numbers won't affect the Fed," said John Ryder, senior economist at Bear Stearns. "They're second-quarter revisions. They're old news. What's going to is the third-quarter data."
Indeed, said David Orr, chief economist at First Union Bank, "The 2Q productivity data will not impact the Fed as much as the markets seem to think it will.
The more important year-to-year increase in non-farm productivity didn't worsen, it actually improved,".
Likewise, he added, the same can be said for the unit labor cost numbers: "We would argue that more relevant [than the 4.5 percent jump] is the year-to- year increase. The second-quarter year-to-year increase in total non-farm unit labor costs was just 1.5 percent, a bit higher than the 1.3 percent in the first quarter, but not a big deal."
"We would not argue the gradual year-to-year increase in unit labor costs is not of concern at the Fed, but are convinced that none of today's data will impact their decision [at their next meeting] on Oct. 5," Orr said.
Last month, in a bid to slow the U.S. economy and keep inflation at bay, the Fed hiked the fed funds rate -- the target rate commercial banks lend to each other overnight -- a quarter of a percentage point to 5.25 percent. It also raised the discount rate -- the rate at which the Fed's district banks lend directly to financial institutions -- by the same amount to 4.75 percent.
The central bank decided, however, to maintain its neutral stance on future rate decisions.