Productivity underlines slow pace of recovery

 @ibtimes
on August 10 2010 9:24 AM

Non-farm productivity fell for the first time in 1-1/2 years during the second quarter and labor costs barely edged up, according to a Labor Department report on Tuesday that underlined a slowing pace of economic recovery.

Productivity declined by an annual rate of 0.9 percent after rising at a revised 3.9 percent rate in the first quarter, the first time since the fourth quarter of 2008 that output per worker fell.

Analysts surveyed by Reuters had forecast that productivity, a measure of hourly output per worker that is taken as an indicator of the economy's vitality or lack of it, would expand at a 0.2 percent annual rate in the second quarter and that unit labor costs would rise 1.3 percent.

Some analysts said the data bode poorly for out-of-work Americans.

When productivity is high and rising then it suggests firms are doing more with fewer people and suggests some pressure to hire new workers. If productivity is falling, as in this case, it suggests they don't need as many workers, said Scott Brown, chief economist for Raymond James & Associates in St. Petersburg, Florida.

Others, however, said employers may have squeezed as much production as possible out of the existing workforce and may need to begin hiring in future.

U.S. financial markets were little changed after the data.

Unit labor costs, a gauge of potential inflation pressures closely watched by the Federal Reserve, edged up at a 0.2 percent annual rate after shrinking at a revised 3.7 percent rate in the first three months this year.

But the data pointed to growing pressure on household incomes, which in turn is likely to crimp spending that fuels overall economic activity.

Compensation per hour contracted at a 0.7 percent annual rate in the second quarter and was flat in the first three months of the year.

Weak productivity is in line with other broad signs that the economic recovery is losing momentum. The overall economy grew at only a 2.4 percent annual rate in the second quarter, down from a 3.7 percent rate in the first quarter.

Fed policymakers were holding a one-day meeting on Tuesday to consider interest-rate policy, but with rates already near zero the speculation was that the U.S. central bank may be mulling other fresh steps to stimulate the economy amid signs that inflation poses little or no current risk.

Some Fed officials worry that with unemployment stuck at a lofty 9.5 percent, employers will seize the chance to push wages down for those still working and prices will come under pressure, possibly triggering a round of punishing deflation.

(Additional reporting by John Parry in New York; Editing by Andrea Ricci)

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