WASHINGTON U.S. non-farm productivity fell in the second quarter as economic activity slackened, while a moderation in the pace of wage growth suggested inflation pressures will remain contained.
Productivity slipped at a 0.3 percent annual rate, the Labor Department said on Tuesday, after falling at a 0.6 percent pace in the first quarter. Unit labor costs grew at a 2.2 percent rate, which was slower than the 4.8 percent pace in the January-March period.
"This suggests businesses have largely exhausted the efficiency enhancing measures that resulted in impressive productivity growth over the last two years," said Paul Dales, senior U.S. economist at Capital Economics in Toronto.
The Federal Reserve, following a scheduled policy-setting meeting on Tuesday, pledged to keep interest rates at record low levels at least until mid-2013 and acknowledged that the economy was weaker than it had previously thought.
Stocks on Wall Street swung between negative and positive territory, while the dollar fell broadly. Prices for Treasury debt rose, with the yield on the two-year note hitting an all-time intraday low of 0.165 percent.
The economy grew at a 1.3 percent annual rate in the second quarter after a meager 0.4 percent rise in the January-March period, sparking fears of a new recession two years after the 2007-09 downturn ended.
Recession fears and Standard & Poor's decision on Friday to strip the United States of its triple-A credit rating have pressured equity markets.
There are concerns that diminishing share values could sour business and consumer confidence and further impair an already weak economy. A survey on Tuesday showed a lack of confidence among small businesses in the country's recovery.
The National Federation of Independent Business' Optimism Index fell 0.9 point in July to 89.9, largely because of weaker expectations for real sales gains and reduced hope for an improvement in business conditions in the next six months.
WEAK ECONOMIC GROWTH
The slowdown in productivity mirrors a sharp slowdown in economic growth during the first half of the year.
Economists had expected productivity, a measure of hourly output per worker, to drop at a 0.8 percent rate and unit labor costs to rise 2.3 percent.
Normally, a slowdown in productivity implies that businesses have to add new workers to raise output. Against the backdrop of weak economic growth, it suggests businesses might have to cut costs to protect profits.
"Continued low productivity growth could be good if it means further rises in demand are met with faster jobs growth," said Dales. But if demand remains weak, there is a danger that businesses may try to boost productivity by cutting jobs."
Productivity grew rapidly as the economy emerged from the 2007-09 recession, peaking at an 8.0 percent growth rate in the second quarter of 2009. The gains were driven by companies cutting costs through maintaining lean staffing levels.
While unit labor costs have risen so far this year after dropping at a record 2.0 percent rate for whole of 2010, inflation is not much of a threat given a 9.1 percent unemployment rate.
"Wage inflation is inching up, but remains low. The deflation threat is distant, and there are no signs that wage inflation is nearby," said Patrick Newport, an economist at IHS Global Insight in Lexington, Massachusetts.
(Additional reporting by Glenn Somerville, Editing by Chizu Nomiyama)