us productivity up 1.7 percent unexpected

U.S. Productivity, Labor Costs Eased Last Quarter (Update1)

By Courtney Schlisserman

May 3 (Bloomberg) - U.S. worker productivity last quarter grew at a slower pace while labor costs moderated, easing concern inflation would accelerate.

Productivity, a measure of how much an employee produces for each hour of work, rose at an annual rate of 1.7 percent, compared with a 2.1 percent increase in the fourth quarter, the Labor Department reported today in Washington. Labor costs, adjusted for productivity, rose at a lower-than-forecast 0.6 percent pace after jumping 6.2 percent in the fourth quarter.

The economy created 455,000 jobs last quarter even as growth slowed to the weakest pace in four years, signaling efficiency had cooled. The slowdown in labor costs may ease concern companies would have to boost prices and raises speculation inflation will moderate.

``The good news is that compensation growth will be only modest,'' Nariman Behravesh, chief economist at Global Insight Inc. in Lexington, Massachusetts, said before the report.

A separate Labor Department report showed the number of U.S. workers filing claims for unemployment benefits unexpectedly fell to a three-month low of 305,000 last week.

The yields on U.S. Treasury securities were little changed after the reports, while the dollar gained against the euro and stock-market futures rose.

Economists forecast productivity would rise at an annual rate of 0.7 percent, compared with a 1.6 percent increase previously reported for the fourth quarter, according to the median projection in a Bloomberg News survey of 72 economists. Estimates ranged from no change to a 2 percent gain.

Forecasts

Unit labor costs were projected to rise at a 3.8 percent annual rate, compared with 6.6 percent in the fourth quarter, according to the Bloomberg survey.

In the 12 months ended in March, productivity rose 1.1 percent, down from a 1.6 percent year-over-year gain the previous quarter. Labor costs rose 1.3 percent from March 2006, compared with a 3.4 percent increase in the 12 months through December.

Compensation for each hour worked rose at an annual rate of 2.3 percent in the first quarter, compared with a 8.5 percent gain in the prior three months.

A change in how the government accounted for bonus payments and stock options was behind much of the slowdown in labor costs, economists said. The Labor Department included bonuses in both the first and fourth quarters of last year, pushing up the year- over-year gain. Stripping that difference out, wages probably still are rising faster than inflation, creating more pressure on companies to push up prices, economists said.

Statistical Noise

``While market participants may embrace what appears to be a substantial cooling in wage pressures, Fed officials will not be fooled by this purely statistical illusion,'' Stephen Stanley, chief economist at RBS Greenwich Capital in Greenwich, Connecticut, said in a report to clients.

Hours worked fell at a 0.3 percent pace last quarter, compared with a 0.8 percent increase in the previous three months. Output rose at a 1.4 percent rate last quarter, less than the 2.9 percent rate the government reported for the fourth quarter.

Among manufacturers, productivity increased at a 2.7 percent rate in the fourth quarter, after a 1.9 percent rate the prior three months. Productivity at non-financial corporations, a measure watched by the Fed, rose at a 1 percent rate in the fourth quarter, down from a 4.1 percent third-quarter gain. These figures are released with a one-quarter lag.

Trend Slowing

Productivity grew just 1.6 percent last year after expanding 2.1 percent in 2005. Efficiency rose an average 3.2 percent per year from 2000 through 2005.

This is ``the reason why the Fed is worried about inflation,'' Michael Gregory, a senior economist at BMO Capital Markets in Toronto, said before the report. Lower productivity ``means unit labor costs are facing more upward pressure and perhaps a little inflationary bias. The Fed is going to be sitting on its hands for a while.''

San Francisco Fed President Janet Yellen said last week that she was concerned the long-term trend in productivity growth may have dropped to a range of 2 percent to 2.5 percent.

``A lower trend rate of productivity growth would help explain the sluggishness in business investment and put upward pressure on inflation for a time,'' Yellen said.

Fed policy makers are scheduled to next vote on the direction of interest rates on May 9. They held the benchmark overnight lending rate between banks at 5.25 percent for a sixth consecutive time at their last meeting on March 21.

Split Opinions

Economists are divided as to whether the recent slowdown in productivity is temporary or whether it signals a longer-term shift. A more permanent slowing ``would have dispiriting consequences for the long-run prospects for growth in living standards,'' Michael Feroli, an economist at JPMorgan Chase & Co. in New York, said in a note to clients.

Economists at Goldman Sachs Group Inc. are among those that have a rosier outlook. The slowdown in efficiency mainly reflects the slump in housing as builders have been slow to fire workers, they said.

``If we exclude the residential investment sector, the economy's productivity performance has been solid and may actually be reaccelerating slightly,'' Andrew Tilton, a Goldman Sachs economist, said in a research report.

The slump in home building was one reason the economy grew at an annual rate of 1.3 percent, the Commerce Department reported on April 27.

Payroll Forecast

A slowdown in employment may be at hand. The economy created 100,000 jobs last month, the fewest in two years, according to the median economist forecast in a Bloomberg News survey ahead of the Labor Department's employment report tomorrow. Average weekly hours worked by production workers may have slipped to 33.8, from 33.9 in March, and average hourly earnings rose 0.3 percent, according to the survey.

Qwest Communications International Inc., the fourth-largest U.S. phone company, is among companies striving to boost productivity. The Denver-based company this week said first- quarter profit almost tripled after it cut operating expenses by 6.2 percent.

Qwest can continue to lower expenses throughout the year with programs that increase efficiency and measure how well employees are doing their jobs, Chief Executive Officer Richard Notebaert said in an interview May 1.

``What we're doing is asking people to perform up to their capabilities and then giving them the tools to let them do that,'' he said.