Productivity surprises with a 4% increase

Internet, technology help bring `happy days'

The economy

May 12, 1999|By BLOOMBERG NEWS

WASHINGTON -- U.S. worker productivity rose more than expected in the first quarter, the government said yesterday in a report that showed how companies are able to boost both production and profits while limiting price increases.

Nonfarm productivity -- calculated as an index of worker output per hour -- rose at a 4 percent annual rate in the first three months of the year after rising at a 4.3 percent rate in the fourth quarter, the Labor Department said. That is the best back-to-back quarterly showing since 1983.

"There's no obvious end to this," said Michael Englund, chief economist at Standard & Poor's MMS in Belmont, Calif. "We're going to have [productivity] numbers in the 2 to 3 percent range for the year, and you can attribute this to the Internet and technology."

The fourth-quarter productivity increase, while less than the government's initial estimate of 4.6 percent, was still the largest gain since the final quarter of 1992. The year-over-year increase of 2.8 percent in the first quarter was the largest since the second quarter of 1996. Analysts were expecting a 3 percent annualized gain in the first quarter.

"Strong growth, low joblessness, high productivity, low inflation and rising incomes and stock prices add up to happy days for the average American," said Tim O'Neill, chief economist at Harris Bank and the Bank of Montreal in Toronto.

The productivity rise also means central bankers at the Federal Reserve probably will not see a need to raise the overnight bank lending rate soon, even as the economy's expansion continues into its ninth year, analysts said.

Wall Street rallied on the news. The Dow Jones industrial average rose 18.90 to 11,026.15. The Standard & Poor's 500 index rose 15.31 to 1,355.61, while the Nasdaq composite index climbed 40.29 to 2,566.68.

Manufacturing productivity rose at a 5.8 percent rate in the quarter, and it was up at a 8.2 percent pace for durable-goods makers, said Ian Shepherdson, chief U.S. economist at High Frequency Economics Ltd. in Valhalla, N.Y. "This is unambiguous good news" that suggests that the core rate of inflation, which strips out food and energy prices, might slow further this year, he said.

What is more, "productivity in services tends to be understated," said Vincent Boberski, a senior economist at Dain Rauscher Inc. in Chicago. "Since roughly 75 percent of the economy is service-based, the true productivity gains are probably being understated."

Gains in productivity are crucial to businesses if they want to absorb rising labor costs and hold down the prices they charge to stay competitive.

Yesterday's report showed that the first-quarter productivity increase was almost as large as the fourth-quarter gain because the number of hours worked rose at a comparatively slow pace while output growth slowed.

Hours worked increased at only a 0.9 percent annual rate, the smallest gain since the first quarter of 1996, after a 2.9 percent fourth-quarter increase. Total output rose at a 5 percent rate in the first quarter, down from a 7.4 percent rate of growth in the fourth quarter.

Unit labor costs -- a separate index tied to productivity that measures changes in worker compensation -- rose at a 0.3 percent annual rate in the first quarter after decreasing at a revised 0.4 percent rate in the fourth quarter, the report showed. Over the four quarters through March, unit labor costs rose 1.3 percent, down from a 1.4 percent increase for the four quarters through December.

Hourly wages adjusted for inflation, meanwhile, rose at a 2.8 percent annual rate in the first quarter after increasing at a revised 2.2 percent rate in the fourth quarter.

The implicit price deflator -- a measure of inflation tied to the productivity report -- rose 1 percent rate in the first quarter after increasing at a revised 0.2 percent rate during the fourth quarter.

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