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The service sector of the U.S. economy grew faster than analysts expected: According to figures released Tuesday by the Institute for Supply Management, activity in the sector rose to 58.9 in November from 57.1 in October -- analysts had forecast a drop to 55.5. Anything over 50 signals expansion, and below that contraction. This marked the index's 44th straight month of expansion. The service sector accounts for 2/3 of all U.S. economic activity. According to Stuart Hoffman of PNC Financial the 'surprise' reading "just reaffirms what the Fed and what the stock market have been saying: manufacturing and construction are weak, but there's strength in other parts of the economy." Construction had a decrease in business activity in October, but real estate and lending saw m/m growth. The prices paid index measures how businesses characterize costs of doing business, and is closely watched by Fed policymakers: the index rose to 55.6 from 51.9. New orders, employment indexes, and exports were up modestly. Separately, the Labor Department reported Q3 0.2% annual productivity growth in nonfarm businesses, vs. a 1.2% gain in Q2. Productivity measures the output for 1 hour of work, and is seen as a vital factor in long term economic growth, allowing companies to make greater profits, increase wages, without raising prices. Unit labor costs -- the cost of wages and benefits per unit of output -- were up 2.3% annually, after experiencing a 9% spike in Q1 and falling 2.4% in Q2. The overall slowdown in growth of unit labor costs is seen by the Fed as a welcome sign of slowing inflation.
• Sources: People's Daily, BusinessWeek/AP, WSJ, II
• Related commentary: David Fry's Daily Market Outlook, Is Stagflation on the Horizon For 2007?, A Very Long Term Look at the Market, 'Goldilocks' Scenario in Danger
• Potentially impacted stocks and ETFs: S&P 500 Index (NYSEARCA:SPY), NASDAQ 100 Trust Shares ETF (QQQQ), iShares Russell 2000 Index ETF (NYSEARCA:IWM), iShares Lehman 1-3 Year Treasury Bond ETF (NYSEARCA:SHY), iShares Lehman 7-10 Yr Treasury Bond ETF (NYSEARCA:IEF), iShares Lehman 20+ Year Treasury Bond ETF (NYSEARCA:TLT)

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Source: Tuesday's Numbers: Strength in Service Sector, Labor Costs Falling