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Published: 8/11/2010

Productivity falls in quarter

BLOOMBERG NEWS

WASHINGTON - Productivity unexpectedly decreased in the second quarter after employers expanded the workweek by the most in four years even as the world's largest economy cooled.

The measure of employee output per hour fell at a 0.9 percent annual rate, the first drop since late 2008, the Labor Department said Tuesday in Washington. Hours worked climbed at a 3.6 percent rate, leading to a 2.6 percent increase in the amount of goods and services produced.

A lengthening workweek signals employers have reached efficiency limits after productivity climbed by the most in five decades in the 12 months to March.

Productivity "is coming back to Earth after what had been unsustainably strong gains," said Michael Feroli, chief U.S. economist at JPMorgan Chase in New York, who projected it would drop. Hours worked "seems to be the margin along which firms are expanding."

Another report Tuesday showed inventories at wholesalers rose 0.1 percent in June, less than forecast, as companies kept stockpiles in line with slowing demand. Sales at distributors dropped 0.7 percent, the most since March, 2009, the Commerce Department said.

The Labor Department revised the first-quarter gain in efficiency to a 3.9 percent pace from 2.8 percent. The data updates went back to 2007, reflecting the annual revisions to gross domestic product issued by the Commerce Department last month.

Labor costs after adjusting for the drop in efficiency rose at a 0.2 percent pace, less than estimated and the first increase in a year, Tuesday's report showed.

The increase in expenses followed a 3.7 percent drop in the first three months of the year that was larger than previously estimated. Economists projected that costs would rise at a 1.5 percent pace, according to the survey median.

The report stirred debate about the outlook for employment and the workweek.

The figures indicate companies will redouble efforts to contain costs as the recovery unfolds, said Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc., a New York forecasting firm.

"Slower growth in output will prompt companies to continue to focus on aggressive approaches to cost cutting," Mr. Shapiro said in a note to clients. "This will heighten obstacles to a convincing labor-market recovery."

Fed Chairman Ben Bernanke last month said the outlook for growth was "unusually uncertain," and signaled that signs of deeper economic weakness would be needed to justify more stimulus. On Aug. 2, Mr. Bernanke said rising wages probably will spur household spending in the next few quarters.

Productivity increased 3.9 percent in the year ended June. It had increased 6.3 percent in the first quarter compared with a year earlier, the biggest 12-month gain since 1962.



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