Productivity Grows Slightly

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

WASHINGTON – Americans' productivity, a key measure of rising living standards, slowed to a 2.2 percent rate of growth in the last three months of 2000 as the economy weakened.

Growth in productivity, the amount of output per hour of work, during the October-December quarter followed a 3.0 percent rate in the third quarter, the Labor Department said Tuesday.

The revised fourth-quarter figure was still a healthy gain and was a better showing than the 2 percent rate of productivity growth many analysts were expecting. But it was slightly weaker performance than the 2.4 percent growth rate the government previously estimated and was the smallest increase since a 2.1 percent rate in the first quarter of 2000.

Unit labor costs, a measure of inflation pressures, rose by a rate of 4.3 percent in the fourth quarter, according to revised figures. That was up from a 3.2 percent rate in the previous quarter and a bit higher than the 4.1 percent rate the government estimated one month ago.

The rise in fourth-quarter labor costs was the biggest since the second quarter of 1999, when costs increased by the same amount. Still, the fourth-quarter increase was not as strong as the 4.5 percent rate many analysts were forecasting.

Gains in productivity are the key to rising living standards because they allow wages to increase without triggering higher inflation that would offset those higher wages.

The slowdown in fourth-quarter productivity reflected the fact that growth in the gross domestic product, the total output of goods and services, also slowed sharply to an annual rate of 1.1 percent in the fourth quarter, the weakest performance in more than five years. That was down sharply from rates of 5.6 percent and 2.2 percent in the second and third quarters, respectively.

Since productivity measures output per worker, when output growth slows as it did between the third and fourth quarters, productivity will also fall because the number of workers remained essentially steady during the two quarters.

Seeking to prevent the faltering economy from skidding into a recession, the Federal Reserve cut interest rates twice in January, totaling a full percentage point. The rate cuts lower borrowing costs, a move designed to spur business investment and consumer spending, which would rev up economic growth. Many analysts believe the Fed will cut rates for a third time at its next meeting March 20.

Fed Chairman Alan Greenspan, delivering his twice-a-year economic outlook report to Congress, said solid productivity gains made even as the economy has slowed dramatically provide support for the view that they represent a lasting structural change in the economy.

"The prospects for sustaining strong advances in productivity in the years ahead remain favorable," Greenspan told the House Financial Services Committee on Feb. 28.

Economists attribute the gains in productivity to massive business investment in computers and other high-tech equipment.

For two decades, from 1973 to 1995, productivity showed lackluster gains of just over 1 percent. However, since that time productivity increases have doubled.

If productivity falters, however, pressures for higher wages could force companies to raise their prices sharply, thus triggering inflation. For all of 2000, productivity surged 4.3 percent, the best showing since 1983. Unit labor costs rose just 0.7 percent during the period, the smallest rise since 1996. The annual figures were not revised.