U.S. Labor Productivity Stronger Than Expected

By BridgeNews U.S. labor productivity grew at an unexpectedly strong pace in the second quarter, reflecting business efforts to contain costs amid an economic downturn. The U.S. Dept. of Labor announced Aug. 7 that non-farm productivity grew at an annual rate of 2.5% in the second quarter, exceeding both financial market expectations for a 1.5% rise and the revised 0.1% productivity increase in the first quarter. Second-quarter productivity growth reflected in part a 2.4% decrease in hours worked. "The drop in employee hours worked was sharper than expected," says First Tennessee Capital Markets Economist Christopher Low. "Firms really clamped down on the number of workers and the number of overtime hours to restrain costs." The Labor Dept. data also show a deceleration in labor prices on a per-unit basis. Unit labor costs grew at a 2.1% rate in the second quarter, down from 5% in the first quarter, and 6.4% in the fourth quarter of last year. Meanwhile, compensation per hour grew at a 4.7% annual rate in the second quarter, following a 5.1% rate in the first quarter, and an 8.9% jump in the fourth quarter. Compensation growth is "still too fast, but heading in the right direction," says Ian Shepardson, an economist at High Frequency Economics. Productivity growth had been accelerating in recent years, reflecting faster GDP growth and advances in technology. But in the past year it has decelerated, tracking the U.S. economic slowdown. "Productivity is behaving as it has in every business cycle as conditions slacken . . . we have seen a standard cyclical slowdown," says Kenneth Mayland, head of Clearview Economics. "Businesses are reigning in labor costs very quickly, which is a positive because it helps restrain inflation," he says. The report incorporated recent revisions to government GDP data, newly benchmarked employment levels, and updated seasonal factors. The new data resulted in downward revisions to productivity growth for the years 2000 and 1999. Non-farm productivity grew 3.0% in 2000 and 2.3% in 1999, compared with the previous estimates of 4.3% and 2.6%, respectively. In spite of those downward revisions, the annual productivity gains remain well above the 1973-1995 average of 1.3%, according to the Bureau of Labor Statistics.

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