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PRODUCTIVITY posts biggest decline in eight years

Updated:
WASHINGTON (AP) _ American workers' productivity, a key ingredient to economic prosperity, posted its worst quarterly showing since 1993 during the first three months of the year.

The Labor Department reported Tuesday that productivity _ the amount of goods and services produced for each hour worked _ declined at a seasonally adjusted annual rate of 1.2 percent in the January-March quarter.

The revised first-quarter productivity performance showed a much sharper decline than the 0.1 percent rate of decrease the government previously reported. It marked the biggest drop since the first quarter of 1993, when productivity fell at a rate of 5 percent.

On Wall Street, the plunge in productivity didn't get investors down. The Dow Jones industrial average rose 114.32 points to close at 11,175.84, lifted by a surge in technology stocks.

Gains in productivity are considered the key to rising living standards because they allow wages to increase without triggering inflation that would eat up those wage gains. If productivity falters, pressures for higher wages could force companies to raise prices, thus worsening inflation.

``I think it is a temporary setback caused by the economic slowdown. I don't think the decline in productivity will last for a prolonged time,'' said Richard Yamarone, economist with Argus Research Corp.

Federal Reserve Chairman Alan Greenspan predicted productivity would weaken as the economy slowed, but suggested the lull would be only temporary. Greenspan has indicated that massive investments by businesses in computers and other productivity-enhancing equipment in recent years has permanently improved the outlook for productivity.

From 1973 through 1995, productivity averaged lackluster gains of just above 1 percent per year. But since 1995, increases have more than doubled, allowing companies to pay workers higher salaries without raising the prices of their products.

Yamarone and other economists viewed the first-quarter productivity performance as a byproduct of a slowing economy, which grew at an annual rate of 1.3 percent in the first quarter, far more slowly than the 2 percent rate the government previously estimated. Many analysts expect productivity to rebound as the economy recovers.

The Fed has cut interest rates five times this year and many economists are hopeful the central bank's aggressive action will permit the economy to stage a turnaround by the end of the year.

``I think the economy is still on track for a steady and slow improvement in long-term productivity,'' said economist Clifford Waldman of Waldman Associates. He and others were encouraged that over the last 12 months ending in March, productivity rose a solid 2.5 percent.

In the first quarter, employees' output went up but their hours worked grew twice as fast, leading to a decline in productivity.

The drop in productivity boosted unit labor costs, a gauge of inflation pressures, at an annual rate of 6.3 percent in the first quarter, after a 4.5 percent rate of increase in the fourth quarter.

The revised first-quarter jump in unit labor costs marked the biggest increase since the fourth quarter of 1990. The government previously estimated labor costs rose at a 5.2 percent rate in the first quarter.

Still, many economists, including Greenspan, have said they don't believe inflation currently poses a risk to the economy. Analysts expect the economic slowdown will ease inflation pressures.

In general, productivity tends to rise strongly when the economy is booming, but gains in productivity can become very weak or fall when the economy slows, as it did beginning in the second half of last year.

During the early part of the slowdown, however, productivity managed to rise at a rate of 3 percent and 2 percent in the third and fourth quarters, respectively. That bolstered the view among some economists that strong productivity gains of recent years are long lasting, rather than simply the fruit of a booming economy

Some economists, however, say a recurrence of the weak first-quarter productivity could call into question the theory that the sizable pickup in productivity growth over the last several years represents a lasting, structural change in the economy.

Another report Tuesday showed manufacturers continue to be hurt by the economic slowdown: Orders to U.S. factories declined by 3 percent in April, following a 0.7 percent rise, the Commerce Department said. The drop reflected slackened demand for cars, computers and semiconductors.

``Weak demand continues to plague the ailing economy,'' said Jerry Jasinowski, president of the National Association of Manufacturers.


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