UPDATE 1-U.S. productivity falls 0.3 pct in second quarter

Tue Aug 9, 2011 9:01am EDT

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WASHINGTON Aug 9 (Reuters) - U.S. nonfarm productivity fell in the second quarter as economic activity slackened, while a moderation in the pace of unit labor costs 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 revised 0.6 percent pace in the first quarter.

Economists had expected productivity to drop at a 0.8 percent rate. Revisions to prior quarters showed productivity growth was slightly stronger in 2010 than earlier reported.

"This suggests businesses have largely exhausted the efficiency enhancing measures that resulted in impressive average annual productivity growth of 3.3 percent over the last two years," said Paul Dales, senior U.S. economist at Capital Economics in Toronto.

U.S. financial markets were unmoved by the data as investors awaited a Federal Reserve policy statement around 2:15 p.m. (1815 GMT).

The Fed is holding a one-day regular policy meeting on Tuesday. Most analysts do not expect the U.S. central bank to make any major changes in policy at the meeting. [ID:nN1E77723B]

The slowdown in productivity mirrors a sharp slowdown in economic growth during the first half of the year, which has raised fears the economy could slide into recession. 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.

Normally, a slowdown in productivity implies that businesses have to add new workers to meet production, but against the backdrop of weak economic growth, it suggests businesses might have to cut costs to protect profits.

"If demand remains weak, there is a danger that businesses may try to boost productivity by cutting jobs," said Dales.

Productivity -- which measures hourly output per worker - 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, particularly for labor.

The productivity report showed unit labor costs grew at a 2.2 percent rate in the second quarter, which was slower than the 4.8 percent pace in the first quarter. Revisions showed unit labor costs contracted more sharply in 2010 than previously estimated.

Economists had expected unit labor costs to rise 2.3 percent in the second quarter. (Reporting by Lucia Mutikani, Editing by Andrea Ricci)

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