Productivity climbs as jobless claims fall

Strong output is viewed as curbing labor costs by dampening hiring plans


WASHINGTON - Fresh signs of a bustling U.S. economy emerged yesterday, spurring expectations of a rise in interest rates, with productivity up solidly and new unemployment-benefit claimants at a 3 1/2 -year low.

In the first quarter of this year, businesses boosted productivity at a solid, seasonally adjusted annual pace of 3.5 percent, the Labor Department said. Output rose at an annual rate of 4.9 percent, while the number of hours worked climbed 1.3 percent.

The resulting productivity gain was in line with private economists' expectations, and it was up from a gain of 2.5 percent in the last quarter of 2003.

"The bottom line is that strong productivity continues to dampen hiring plans and is keeping labor costs in check," said a report by Merrill Lynch chief North American economist David Rosenberg and senior economist Jose Rasco.

"The result is that despite the run-up we have seen in many input prices, until the labor markets are firmer and labor costs rise at a much more meaningful pace, inflation gains should remain moderate," the Merrill Lynch report said.

Stunning advances in productivity, or output for each hour worked, have helped to raise the maximum speed of the U.S. economy, but they also have allowed employers to shut the door on new workers, analysts say.

The pace of productivity gains has moderated, however, since it hit a 20-year high annual rate of 9.5 percent in the third quarter of last year.

Meanwhile, the number of new unemployment benefit claimants dropped to a seasonally adjusted 315,000 in the week ending May 1, the lowest since October 2000, the Labor Department said. That's down 25,000 from the previous week.

It was an encouraging sign on the eve of the release of official unemployment figures for April.

Private economists generally believe that the world's largest economy added 165,000 jobs in April after churning out a four-year record 308,000 new jobs in March.

"The economy is firing on all cylinders, and demand is rising," said Wells Fargo Banks chief economist Sung Won Sohn.

"Although the rise in demand has not put significant upward pressure on prices yet, it is beginning to put upward pressure on payroll expansion," he said in a report.

Federal Reserve Chairman Alan Greenspan said homeowners, consumers and businesses should be able to withstand higher rates.

On Tuesday, Greenspan and his fellow policy-makers indicated the days of near-rock-bottom rates - with the federal funds target rate at a 1958 low of 1.0 percent for the past 10 months - were numbered. Rates could rise at a "measured" pace, they said.

Private economists widely expect a rate increase to come this summer, possibly as early as the June 29-30 meeting of the central bank.

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