Productivity Grows at 2.4 Pct. Rate

Wednesday, February 7th 2001, 12:00 am
By: News On 6

WASHINGTON (AP) — Despite a sharp slowdown in the final quarter of 2000, Americans' productivity for all of last year posted the best gain since 1983, capping a remarkable five-year stretch of growth in this important indicator of rising living standards.

Worker productivity — the amount of goods and services produced for each hour worked — rose at an annual rate of 2.4 percent in the last three months of 2000 as the nation's economic growth lagged, the Labor Department reported Wednesday. That was slower than a 3 percent growth rate in the previous quarter, but still a healthy gain, economists said.

``Clearly productivity is holding up even as the rest of the economy is slowing down,'' said National Association of Manufacturers President Jerry Jasinowski.

For all of 2000, productivity surged 4.3 percent, the best showing since a 4.5 percent gain in 1983. Last year's surge in productivity capped a five-year stretch in which productivity growth averaged a strong 2.8 percent, double the lackluster average growth rate of 1.4 percent in the two decades since 1973, a fact often noted by Federal Reserve Chairman Alan Greenspan.

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

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

Some economists increasingly believe that the sizable pickup in productivity growth over the past several years represents a lasting structural change in the economy.

Greenspan, in testimony to Congress last month, said that solid productivity gains made even as the economy has slowed ``have added to the accumulating evidence that the apparent increase in the growth of output per hour are more than transitory.''

The slowdown in fourth-quarter productivity reflected the fact that the gross domestic product — the total output of goods and services — grew at an annual rate of 1.4 percent in the fourth quarter, the weakest performance in more than five years.

Productivity measures output per worker. When output growth slows, productivity also slips because companies do not reduce their work force as fast as they cut production.

The fourth-quarter performance was the slowest since a 2.1 percent rate in the first quarter of 2000.

Economists believe productivity will continue to grow in the coming quarters but at a lower rate than last year, given the economic slowdown and businesses' reduced investment in high-tech equipment.

Greenspan has estimated that in the current quarter economic growth could be ``very close to zero.''

Seeking to prevent the faltering economy from skidding into a recession, the Federal Reserve cut interest rates again last week, the second half-percentage point reduction in January. The rate cuts lower borrowing costs, a move designed to spur business investment and consumer spending, which would rev up economic growth.

In making that decision, Fed policy-makers said that gains in productivity ``exhibit few signs of abating'' and that these gains along with lower interest rates ``should support growth of the economy over time.''

Wednesday's report also showed that unit labor costs, a key gauge of inflation pressures, rose by a bigger-than-expected rate of 4.1 percent in the fourth quarter, the largest increase since the second quarter of 1999. But for all of last year, unit labor costs went up by just 0.7 percent, the smallest rise since 1996.

``We did see a further pickup in wages and benefit pressures, including costs of health care, as the year came to close, but the impact on inflation has been minimal at this point because companies lack the general ability to raise prices to cover rising labor costs,'' said Lynn Reaser, chief economist at Banc of America Capital Management. She said the increase did pose a threat to companies' profit margins.

Some economists believe labor costs will moderate as the economy continues to slow.

But Paul Kasriel, chief economist at the Northern Trust Co., and Sung Won Sohn, chief economist at Wells Fargo, worry that might not be the case and there could be a pickup in inflation. But neither believed it would dissuade the Fed from continuing to cut interest rates in the coming months.


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