WASHINGTON - U.S. worker productivity grew in the second quarter at more than double the pace of the previous three months, and labor costs fell, giving Federal Reserve policy-makers further reason to refrain from raising interest rates this month.
Productivity, a measure of output per hour worked, rose at a 5.3 percent annual rate in the second quarter after a 1.9 percent rate of increase in the first quarter, the Labor Department said yesterday. The increase over the past 12 months was the largest in 17 years.
As a result of the productivity gains, labor costs fell at a 0.1 percent rate in the second quarter after rising at a 1.9 percent pace in the first. "With no inflation threat from labor costs, the Fed will be hard-pressed to raise rates" Aug. 22, said Rich Yamarone, senior economist at Argus Research in New York.
In June, Fed policy-makers held the overnight bank lending rate at a nine-year high of 6.5 percent, citing tentative signs of slower economic growth. They have raised interest rates six times since June 1999 to crimp consumer and business borrowing and prevent the economy from overheating.
Fed officials have said productivity is a primary reason the economy has been able to grow faster without causing inflation to accelerate, and suggested that they are not worried about spending increases by businesses that enable workers to do their jobs with greater efficiency.
The latest figures on economic growth show that business investment in equipment and software alone surged at a 21 percent annual rate in the second quarter after a 20.6 percent pace of increase in the first quarter.
Fed policy-makers expect the economy to slow in the latter part of this year. "The test for productivity will come if the economy is slowing and we see output starting to slow," Chicago Fed Bank President Michael Moskow told a state treasurers group yesterday. "We'll then get a better understanding of whether our productivity growth, this very significant productivity growth, is cyclical, is due to the faster rate of output growth, or if it's structural."
U.S. stocks and Treasury securities gained after the report. The Dow Jones industrial average rose 109.88 points, or 1 percent, to close at 10,976.89; the Standard & Poor's index of 500 stocks rose 3.49 points, or 0.2 percent, to 1,482.81; and the Nasdaq composite index fell 14.44 points, or 0.4 percent - its first loss in four sessions - to 3,848.55.
Compared with the second quarter last year, productivity was 5.1 percent higher, the largest year-over-year increase in a single three-month period since a 5.3 percent gain in the third quarter of 1983.
Analysts had expected productivity to rise a 4.5 percent annual rate in the second quarter and unit labor costs to rise at a 0.4 percent pace.
For manufacturers, productivity rose at a 5.1 percent annual pace in the second quarter, compared with a 7.9 percent annual rate in the first quarter. Compared with the second-quarter last year, manufacturing productivity rose 6.9 percent, up from a 6.8 percent year-over-year gain in the first quarter.
The gain in productivity for the quarter was assured because U.S. gross domestic product, or the nation's total output of goods and services, grew at a 5.2 percent pace in the second quarter. The government measures productivity in effect by measuring the gross domestic product of private businesses and dividing by the number of hours those businesses report their employees worked.
Total worker output grew at a 5.9 percent rate in the second quarter from a 5.2 percent rate in the previous quarter. The number of hours worked increased at a 0.5 percent rate, down from a 3.2 percent rate in the first quarter.
The implicit price deflator - a measure of inflation tied to the productivity report - increased at a 2.2 percent rate in the second quarter compared with a 3.2 percent rate in the first quarter.