U.S. PRODUCTIVITY drops first time in six years

Tuesday, May 8th 2001, 12:00 am
By: News On 6

WASHINGTON (AP) _ Americans' productivity, a key measure of rising living standards, fell at a 0.1 percent rate in the first quarter as the economy weakened. The decline was the first in six years.

The drop in productivity _ the amount of output per hour of work _ during the January-March quarter surprised analysts, who generally were expecting an increase at a 1 percent annual rate.

The Dow Jones industrial average was down 103 points at midday Tuesday and the Nasdaq index had lost 4 points.

The productivity decrease followed a 2 percent annual rate of growth in the fourth quarter of last year.

The Labor Department report Tuesday also showed that unit labor costs jumped by a 5.2 percent rate in the first quarter, the biggest increase since the fourth quarter of 1997, when they rose at a 5.5 percent rate.

``This report suggests that productivity is not as miraculous as some had thought,'' said Paul Kasriel, chief economist at Northern Trust Co. ``And, the Federal Reserve's fears of higher labor costs in relation to productivity are coming to pass.''

The 0.1 percent decline in productivity marked the first since a 0.8 percent rate of decrease in the first quarter of 1995.

Federal Reserve Chairman Alan Greenspan, in an April 27 speech, said productivity would probably moderate because of the weaker economy, but that the lull should be only temporary.

Greenspan, in the speech, indicated he still believed that massive investments in computers and other high-tech equipment in recent years had permanently improved the outlook for productivity.

When the economy slows as it did beginning in the second half of last year, gains in productivity usually become very weak or actually fall, economists say.

The Bush administration said Tuesday's report offers another reason why Congress should quickly pass tax-relief to help shore up economic growth.

``The productivity numbers ... are an additional sign of weakness in the economy,'' said White House spokesman Ari Fleischer. ``The president hopes that members of Congress will look at these latest productivity numbers and move forward to pass his budget and tax-cut plans.''

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

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

Tuesday's report showed that wage pressures intensified. The 5.2 percent rate of growth in unit labor costs, a measure of inflation pressures, followed a 4.5 percent rate of increase in the fourth quarter. Many analysts were expecting another 4.5 percent rate of increase in the first quarter.

To discern trends, economists often look at labor costs and productivity growth over a longer period, which tends to smooth out quarterly fluctuations. Over the last 12 months, labor costs rose 3.1 percent while productivity grew 2.8 percent.

Trying to stave off recession, the Federal Reserve slashed interest rates four times this year in an effort to rejuvenate economic growth. Economists expect another half-point cut when policy-makers meet May 15. But Kasriel predicts the central bank will go with a smaller, quarter-point reduction, in part because of rising labor costs seen in Tuesday's report and his belief that inflation is worsening.