updated 6/2/2005 11:38:06 AM ET 2005-06-02T15:38:06

Orders to U.S. factories advanced in April at the fastest clip in five months while productivity rose at an annual rate of 2.9 percent in the first three months of this year, better than first thought. But labor costs, a key factor influencing future inflation rates, rose sharply over the past six months.

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The Commerce Department said Thursday that factory orders rose by 0.9 percent in April as demand for durable goods posted a solid 1.9 perent gain, the first increase in four months, led by strength in demand for autos and aircraft. This strength offset a 0.2 percent decline in orders for non-durable goods, items not expected to last three years.

Meanwhile, the Labor Department reported that productivity went up at an annual rate of 2.9 percent in the quarter after surging a revised 7.7 percent in the final three months of 2004, gains certain to raise concerns at the Federal Reserve about inflationary pressures.

The report on factory orders showed no change from in the overall increase for durable goods from an original estimate last week of a rise of 1.9 percent. The 0.2 percent drop in non-durable goods followed a huge 3 percent rise in March and a 1 percent decline in February.

The government’s new report on productivity and unit labor costs reflected major alterations to previous data which had showed unit labor costs rising at a much more measured pace.

The 7.7 percent jump in labor costs in the fourth quarter was the fastest quarterly gain since an 8.9 percent surge in the third quarter of 2000. It had earlier been reported as a much more modest 1.7 percent increase.

Labor Department analysts said the sharp upward revision occurred because of revised source data.

The third quarter performance of unit labor costs was revised to show a gain of 4.5 percent while the second quarter gain last year was changed to an increase of 1.8 percent.

The increases were all above the small 0.8 percent rise for all of 2004 and the actual decline of 0.3 percent in unit labor costs in 2003.

The upward revisions were certain to prompt the Federal Reserve to examine whether the economic recovery from the 2001 recession was beginning to trigger higher wage pressures that could spur unwanted inflation.

The Fed has been increasing a key interest rate by gradual quarter-point moves over the past year and has so far pledged to keep moving at a moderate pace because of officials’ belief that inflation pressures outside of energy have remained well contained.

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