U.S. Productivity Increases 1.8%, More Than Forecast

(Bloomberg) -- Worker productivity in the U.S. grew more than forecast in the fourth quarter as companies cut employees' hours at the fastest pace in almost five years.

Productivity, a measure of employee efficiency, rose at an annual rate of 1.8 percent, after a 6 percent pace in the third quarter, the Labor Department said today in Washington. The median forecast in a Bloomberg News survey was for a 0.5 percent gain. Labor costs rose less than forecast, the figures showed.

Businesses are trimming staff to control expenses as the economy hovers on the verge of the first recession since 2001. That may help keep consumer prices in check, giving Federal Reserve policy makers more leeway to lower interest rates, economists said.

``Productivity still looks fairly healthy and labor costs are tame,'' said James O'Sullivan, a senior economist at UBS Securities LLC in Stamford, Connecticut. ``This gives the Fed more flexibility to respond to weakness in growth. It certainly looks like there is more easing to come.''

The median forecast for productivity was based on 71 estimates in a Bloomberg News survey. Projections ranged from a drop of 0.6 percent to a gain of 2.7 percent.

Treasury notes, which had fallen earlier in the day, stayed lower after the report. Ten-year yields advanced to 3.59 percent from 3.57 percent late yesterday.

Labor Costs

Unit labor costs, which are adjusted for gains in efficiency, rose 2.1 percent after dropping 1.9 percent in the prior three months. Economists in the Bloomberg survey had projected a 3.5 percent increase.

Hours worked dropped at a 1.5 percent pace, a second consecutive decline and the biggest since the first three months of 2003.

Compensation for each hour worked increased at an annual rate of 3.9 percent, compared with a 4 percent gain the prior quarter.

Productivity for all of 2007 rose 1.6 percent after increasing 1 percent the previous year. Labor costs rose 3.1 percent, the most since 2000.

Productivity at non-financial corporations, a measure watched by former Fed Chairman Alan Greenspan, rose at a 3.7 percent rate in the third quarter after rising 2.1 percent in the prior three months. The figures are released with a one- quarter lag.

Among manufacturers, productivity increased at a 2.5 percent pace last quarter, following a 4 percent gain.

Productivity gains may be harder to come by as the economy weakens because businesses are usually slow to reduce staff, economists said.

Slower Growth

Economic growth slowed to an annual rate of 0.6 percent in October through December, down from a 4.9 percent pace in the third quarter, according to government figures last week. A report from the Institute for Supply Management yesterday showed service industries unexpectedly contracted in January at the fastest pace since the 2001 recession.

Still, some businesses have already reacted to the demand slowdown. Companies added 1,000 workers to payrolls in January, while government agencies reduced staff. The economy lost 17,000 jobs overall, the first decline in more than four years. Hourly wages rose 0.2 percent last month, less than economists had forecast.

Labor expenses account for about two-thirds of the cost of producing a good or service.

 

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