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Economy Slowing As Inflation Flares, Latest Data Show

CNBC.com
Tuesday, 6 Mar 2007 | 10:51 AM ET

The economy is showing fresh signs of slowing, while a key inflation measure was stronger than expected, according to the latest data.

New orders at U.S. factories tumbled by a greater-than-expected 5.6% in January, the biggest decline in more than six years, on a big drop in aircraft orders, a Commerce Department report showed.

Meanwhile, business productivity growth was revised down sharply for the fourth quarter to an annualized 1.6% pace. The slippage in productivity sent unit labor costs up at a 6.6% annualized rate in the quarter.

Unit labor costs are a gauge of inflation and profit pressures that are watched closely by the Federal Reserve. The combination of lower productivity and higher wages, if sustained, would raise alarm bells at the Fed about inflation.

Productivity & Cost Revisions
A look at productivity and costs revisions, the bond market and the futures market with CNBC's Rick Santelli and Scott Nations, Fortress Trading president

Separately, pending sales of existing U.S. homes fell a sharper-than-expected 4.1% in January,
bucking a December gain, a real estate agents' trade association said.

The government said that orders for big-ticket durable goods plunged by 8.7%, even bigger than the 7.8% drop that had been reported a week ago. That report, which increased worries about the economy's health, played a role in the 416-point single-day drop in the Dow Jones industrial average a week ago.

Tuesday's markets, however, showed little reaction to the economic data.

The report on factory orders, coupled with other data showing weaker-than-expected activity, have raised concerns that the current economic slowdown may be more serious than previously expected.

However, Federal Reserve Chairman Ben Bernanke told Congress last week that he had seen nothing in the latest reports to change the Fed's outlook for moderate growth this year.

The weakness in manufacturing was led by a 19% fall in orders for transporation products, reflecting a 6.7% drop in the struggling auto industry and a 60% percent plunge in demand for commercial airplanes. The airplane category, which is extremely volatile, had posted a huge increase in December, reflecting an unusually large of orders to airplane giant Boeing.

Demand was also down for primary metals, machinery and computers.

Orders for nondurable goods, items such as petroleum and food, fell by 2% in January after a 1.5% increase in December.

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