Reports show an economy that is growing, but slowly

WASHINGTON -- Four economic reports painted a picture of a slowly growing economy Thursday. They said:

• Growth at service firms was slow but steady in October and hiring increased.

• Companies increased orders to factories slightly in September while boosting demand in a key category that tracks business investment plans by the largest amount in six months.

• Fewer people applied for unemployment benefits last week, a hopeful sign that the job market might be picking up.

• Workers increased their productivity this summer by the largest amount in a year and half, and they cost their employers less.

In the first report, the Institute for Supply Management said Thursday that its service sector index dipped slightly to 52.9, from 53 in September. But any reading over 50 indicates expansion. The index covers retailers, financial services firms, hotels and all other non-manufacturing industries that employ 90% of workers.

The overall ISM index is just above a 17-month low reached in July. It set a five-year high of 59.7 in February.

Firms said that growth in new orders decreased and that there were fewer orders in the pipeline, signs that service sector could weaken in the months ahead.

But the survey showed firms added jobs in October after cutting them in September. An index measuring employment rose to 53.3, after falling below 50 the previous month.

"This is yet more evidence that recession risks have faded, but that the outlook for growth remains weak," said Paul Dales, senior U.S. economist at Capital Economics, in a note to clients.

In the second report, the Commerce Department said total factory orders increased for a third month, edging up 0.3%. Demand for core capital goods, the category that serves as a proxy for business investment spending, jumped 2.5%, largest increase since a 5.4% rise in March.

The surge in demand for capital goods reflected significant increases in demand for heavy machinery and computers. These gains were seen as a positive sign for the weak economy, showing that businesses are sticking with plans to expand and modernize.

In the unemployment claims report, the Labor Department said weekly applications for unemployment benefits dropped 9,000 to a seasonally adjusted 397,000, lowest level in five weeks. It's only the third time since April that applications have fallen below 400,000.

The four-week average, a less volatile measure, fell to 404,500, fifth drop in the past six weeks. The declines indicate companies are laying off fewer workers.

The figures come a day before the government issues the October jobs report. Economists expect that will show a net gain of 100,000 jobs, with the unemployment rate remaining 9.1%.

Weekly unemployment claims need to fall below 375,000 to signal sustained job gains. They haven't been at that level since February.

In the productivity report, the Labor Department said productivity rose at an annual rate of 3.1% in the July-September quarter after two straight quarterly declines. Labor costs dropped at an annual rate of 2.4% in the quarter, first decline since late 2010.

Productivity is the amount of output per hour of work. The big jump in productivity in the third quarter reflects the fact that economy had its best quarterly growth in a year while hours worked were little changed.

Higher productivity is generally a good thing because it can raise standards of living by enabling companies to pay workers more without raising prices and increasing inflation.

Rising labor costs reduce corporate profits. When workers are less productive and cost more, companies are less likely to add jobs.

Worker productivity fell the first six months of the year, while labor costs increased. That was largely because consumers cut spending in the face of higher food and gasoline prices, which slowed overall economic growth.

Over the summer, consumers increased their spending at triple the rate from the spring. That helped the economy expand at an annual rate of 2.5% in the July-September quarter, which likely boosted worker productivity.

When demand rises and productivity is low, it's usually a sign that businesses have reached the limit on the amount of work they can squeeze out of their work forces. That often leads some to hire more workers, if they want to grow.

But economists worry that the demand from this summer won't be sustained. The growth was fueled by Americans who spent more while earning less and by businesses that invested in machines and computers, not workers.

Without more jobs and higher wages, consumers are likely to pare spending next year.

Economists expect productivity to slow the next couple of years while labor costs rise. Forecasters with the National Association for Business Economics predict productivity growth will slow to 1% this year compared with growth of 4.1% in 2010.

However, analysts said the slowdown in productivity growth has played a role in the modest gains seen this year in employment.