Economic news disappoints Tuesday, but Fed leaders remain optimistic. A number of reports were released this morning, including data on productivity and costs, factory orders and same-store sales. Data on pending home sales was also released, along with speeches by Fed Chairman Bernanke and Treasury Secretary Henry Paulson.

Productivity gains in the fourth quarter were revised sharply lower to growth of 1.6 percent from the initial reading of 3.0 percent. The recent revision to fourth quarter GDP led to the decline, which was expected. However, unit labor costs rose to 6.6 percent from 1.1 percent and were well above estimates for a revision to 3.0 percent. This creates some added concern about inflationary pressures, especially in the jobs market, but we'll have to wait and see what the February employment has to say on Friday.

Factory orders in January fell by 5.6 percent, which was worse then the 4.5 percent decline expected. However, much of this drop was due to lower orders for Boeing (BA). Even so, factory orders less transportation sell fell 2.9 percent. Unfortunately, this data confirms the view that the manufacturing sector is seeing a deceleration in growth. However, last week's ISM Index helped alleviate some worries when it came in higher than expected.

There has been a lot of talk about the housing sector and sub-prime lending. The fear is that bad loans this past year will lower the amount of loans given to consumers with less than perfect credit. This could put further pressure on the housing sector. Today's pending home sales index showed a decline of 4.1 percent in January. This report is a leading indicator for existing home sales, showing the amount of contracts signed, but not closed. During the past year, this index has fallen 8.9 percent, but this is better than the double digit percentage declines seen in late 2006. 

For the week ending March 3, same-store sales fell by 0.4 percent week on week. The ICSC-UBS also showed that year on year sales fell to growth of just 1.5 percent from the prior week's reading of 2.2 percent. This is the lowest growth rate in more than three years. The Redbook report wasn't as bearish, showing a year on year growth rate of 2.9 percent, down just a tenth from the prior week. Both the ISCS and Redbook reports believe same-store sales in February will be solid near 3.0 percent. We will get this information on Thursday when the majority of retailers report this matrix.

Fed Chairman Bernanke spoke today in Hawaii, but did not talk about monetary policy or the economy. However, former Fed Chairman Alan Greenspan made headlines again. As follow up to his comments last week that the U.S. could be heading for a recession, Mr. Greenspan stated today that there is a 33 percent chance of a recession this year.

Helping to offset Mr. Greenspan's comments were bullish statements from Treasury Secretary Henry Paulson. Mr. Paulson stated that he does not believe that the weak U.S. housing market and sub-prime problems will have a major impact on the financial sector or the global economy. In fact, he believes the global economy has been as strong the past couple of years as he has seen in a lifetime.

Tomorrow will be a quieter day for economic news, but not complete void of data. Traders will get a possible preview of how strong the jobs market was in February from the ADP Employment Report. However, it will be the Beige Book that will garner most the attention. A speech by Chicago Fed President Michael Moskow could also have a market moving impact. 

Jody Osborne
Senior Staff Writer & Options Strategist
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