Worker output growth eases up

But 2.9% increase exceeds forecast, is considered strong

Pace might let companies do less hiring

August 11, 2004|By BLOOMBERG NEWS

WASHINGTON - The productivity of U.S. workers grew at a 2.9 percent annual rate from April through June, a pace that might be solid enough for companies to limit hiring, the Labor Department reported yesterday.

Labor costs accelerated.

The second-quarter increase followed a 3.7 percent rate of growth in the first quarter and was the slowest in almost two years, the department said. Productivity was higher than the median forecast of 2 percent in a Bloomberg News survey of 61 economists, and strong by historical standards.

Companies are focused on preserving gains in efficiency won over the past couple of years, making a rebound in hiring less likely, economists said. Payrolls increased by 32,000 last month, the least this year, after gross domestic product slowed to a 3 percent rate of growth in the April-June period from 4.5 percent in the first quarter.

"The implication is that hiring will have to be controlled," said Joel Naroff, president of Naroff Economic Advisors in Holland, Pa. "In the face of high energy costs, slowing demand and relatively limited pricing power, the bottom line can only be fed through improved productivity."

The report also showed that unit labor costs rose at a 1.9 percent annual rate after growing at a 0.3 percent rate in the first quarter.

The Federal Reserve's policy-making body, the Federal Open Market Committee, said yesterday that "robust underlying growth in productivity" provides continuing support to the economy. The central bankers raised the benchmark interest rate to 1.5 percent from 1.25 percent and said the new level is low enough to keep stimulating growth.

The committee attributed much of the weakness in the economy, which showed up in economic reports for June, to the "substantial rise in energy prices."

"The economy nevertheless appears poised to resume a stronger pace of expansion," the committee said.

Labor costs could move higher in coming quarters with economic growth, leading the Fed to increase rates further this year, said Joseph LaVorgna, chief U.S. economist for fixed-income securities at Deutsche Bank Securities LLC in New York.

Efficiency gains have a limit unless companies step up hiring, said William Zadrozny, chief executive of Siemens Financial Services, a unit of Siemens AG, in Iselin, N.J.

Diminishing return

"We ask people why they're putting their money into machinery and equipment, and they say it's to become more efficient," he said. "But machinery can only provide a certain amount before you have to hire."

The gain in productivity was the weakest since the fourth quarter of 2002. Even so, it was 4.7 percent higher than in last year's second quarter, after a 5.6 percent increase in the first quarter. The second-quarter gain from the previous year was the smallest since an increase of 4.2 percent in June last year.

The second-quarter rise is in line with the average annual increase of 3 percent since 1996. Productivity rose an average 1.5 percent a year in the previous two decades.

The number "is still quite healthy," said Douglas Porter, senior economist at BMO Nesbitt Burns in Toronto. Productivity is "incredibly strong," he said.

The first-quarter gain in productivity was initially reported as 3.8 percent.

Yesterday's report said labor costs rose 0.2 percent in the 12 months that ended in June. The year-over-year increase was the biggest since the fourth quarter of 2001, when the recession ended.

Hours worked rose at a 0.8 percent pace, compared with a 2 percent increase in the first quarter. Output increased at a 3.8 percent rate, compared with a 5.7 percent gain in the previous three months.

Slowing expected

Among manufacturers, productivity grew at a 7.5 percent pace in the second quarter, more than twice the 2.8 percent increase from January through March.

For the year, productivity is likely to slow after growing 4.4 percent in each of the past two years, some economists said. Productivity gains will probably average 2.5 percent in the second half of the year, according to a forecast by Henry Willmore, chief economist at Barclays Capital Inc. in New York.

The Labor Department's report reflects revisions of the productivity figures as far back as the first quarter of 2001. The revisions are based on updated information on the gross domestic product that the Commerce Department issued last month.

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