2nd quarter productivity declines

August 10, 1994|By New York Times News Service

In a sign that the current business expansion is reaching a mature phase, the Labor Department reported yesterday that the productivity of American workers fell during the second quarter -- the first decline in more than a year.

And, in a report economists said could lead the government to revise downward its estimate of second-quarter growth in coming months, the Commerce Department said stockpiles of unsold wholesale goods fell during June.

The figure suggests that businesses were not stockpiling goods as rapidly as the Commerce Department estimated when it released preliminary figures for second-quarter economic growth last month.

The sharp rise in inventories reported then sparked a sharp debate in the stock and bond markets about their impact on the economy and on the possible timing of another short-term interest rate increase by the Federal Reserve.

Many analysts had said that the rise in inventories, combined with a sharp slowdown in consumer spending, would lead to slower economic growth and a cutback in manufacturing and production in the months ahead. But others, including officials at the Federal Reserve, were worried that consumer spending could rebound and, therefore, the economy could actually grow faster.

Yesterday's reports had no real impact on financial markets, partly because a drop in productivity had been widely expected and partly because monthly inventory numbers are subject to constant revision.

The 1.2 percent drop in productivity during the second quarter followed gains of 4.1 percent and 4.9 percent in the third and fourth quarters of 1993 and a revised 2.9 percent rise in the first three months of 1994.

Analysts noted that the big gains during the latter half of last year were consistent with an economy in an early phase of expansion, a period when businesses, in an effort to control costs, work employees longer and harder rather than add to payrolls.

But job growth has been strong since the start of the year -- just under 2 million jobs have been created in the last seven months. That sort of growth in employment means that productivity, which measures the time, effort and cost of producing goods, is bound to decline.

Reflecting the surge in employment, the Labor Department said the number of hours worked increased by 5.4 percent in the second quarter, more than double the increase reported for the January-March period. The gain in hours was the largest since a 6.1 percent rise in the second quarter of 1988.

"As the expansion continues to mature, the sharp productivity gains of the recent past will probably slow," said Donald J. Fine, chief market analyst at Chase Securities Inc.

Even with the sharp increase in payroll employment, labor costs remained largely in check. Unit labor costs for nonfarm businesses rose 2.0 percent in the second quarter.

"The wage numbers were very well behaved," said Stuart G. Hoffman, senior vice president and senior economist at PNC Financial Corp. in Pittsburgh. "You worry about productivity dropping because it suggests you are adding to unit labor costs. But these figures were a bit of a silver lining" in the productivity report.

Mr. Hoffman and other analysts said they expect productivity numbers to improve a bit in the second half of the year, in large part because of a slowdown in economic growth they are forecasting.

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