Productivity grows at 1.1 percent rate in second quarter, slowest pace in a year

Friday, August 9th 2002, 12:00 am
By: News On 6

WASHINGTON (AP) _ Productivity grew at its most sluggish pace in a year, rising at an annual rate of 1.1 percent in the second quarter, reflecting an economic recovery that has lost considerable momentum from the beginning of the year.

The downshifting in business efficiency came after productivity _ the amount of output per hour of work _ soared at a rate of 8.6 percent in the first quarter, the strongest showing since the spring of 1983, the Labor Department reported Friday.

``This is a temporary and expected slowdown,'' said economist Ken Mayland, president of ClearView Economics. ``There's no question in my mind that as the economy's growth rebounds, productivity will grow commensurately.''

The 1.1 percent growth rate marked the weakest performance since the second quarter of 2001, when productivity actually dipped by 0.1 percent. Some economists forecast productivity in the second quarter would grow by as little as a 0.5 percent pace, while others predicted a growth rate of 1.5 percent.

The slowdown in second-quarter productivity came as output grew at a rate of just 0.5 percent and businesses cut workers' hours at a rate of 0.7 percent.

Analysts were forecasting a slowdown in productivity gains in the second quarter because the economy also was losing steam at the time. The economy grew at a rate of just 1.1 percent in the second quarter, down from a brisk 5 percent pace posted in the first quarter.

Against this backdrop, the Federal Reserve is likely to keep short-term interest rates at 40-year lows at its meeting next week. The Fed has opted to hold rates steady so far this year.

Businesses _ uncertain about the economic recovery _ have been reluctant to make big commitments in hiring workers and in capital spending, two forces that have been tempering the recovery's strength.

To improve pressed profit margins, companies during last year's recession laid off workers and managed to produce more with fewer workers. Wary companies are still keeping their work forces relatively lean, economists said.

The moderation in productivity put more pressure on unit labor costs in the second quarter. They rose at a rate of 2.4 percent, slightly faster than the 2 percent pace analysts were forecasting. In the first quarter, unit labor costs fell at a rate of 4.6 percent.

The 2.4 percent growth rate in unit labor costs marked the fastest increase since the first quarter of 2001.

Even with the expected slowdown in productivity gains, Federal Reserve Chairman Alan Greenspan has said he remains bullish about the long-term prospects of productivity growth.

He and other economists have suggested that the strong productivity gains seen in the late 1990s weren't just a passing fluke related to the economic boom and big investments by companies in productivity-enhancing computers and other high-tech equipment. Rather, those gains may reflect a more lasting change involving how companies are managed, structured and employ technology.

Gains in productivity allow companies to pay worker more without raising prices, which would eat up those wage gains. And, productivity gains permit the economy to grow faster without triggering inflation.

For the 12 months ending June, productivity rose by a brisk 4.7 percent, the strongest showing since 1983. ``That's huge,'' said Mayland.