Second quarter productivity raised, wage inflation muted

Office workers are seen at a call center in Orlando, Florida, August 30, 2011.

WASHINGTON (Reuters) - Nonfarm productivity increased at a much faster clip than initially thought in the second quarter as businesses largely held the line on hiring even as output rose, helping to keep inflation pressures tamped down.

Productivity increased at a 2.2 percent annual rate, the Labor Department said on Wednesday. A month ago it estimated that productivity, which measures hourly output per worker, rose at a 1.6 percent pace. It fell at a 0.5 percent rate in the first three months of 2012.

Economists said the rise was likely to be short-lived, and that businesses might need to step up hiring soon.

"When mediocre output growth is achieved during a virtual hiring freeze, as was the case in the second quarter, the spike in productivity is generally temporary and payback is typical in the following months," said Erik Johnson, a U.S. economist at IHS Global Insight in Lexington, Massachusetts.

The economy created a measly 219,000 jobs in the April-June period, about a third of the first quarter's tally.

"A widening gap between output and employment growth is a positive for the economy as long as the labor market itself is flourishing," said Johnson. "It is unlikely that firms will be able to continue generating modest output growth without more proportional increases in hiring."

Hiring did pick up in July, with employers adding 163,000 workers to their payrolls. Economists believe the momentum slowed in August.

The upward revision to productivity growth, which beat economists' forecasts for a 1.8 percent rate, reflected an upward adjustment to the estimate for second-quarter economic growth to a still-sluggish 1.7 percent pace from 1.5 percent.

The economy has been hit by fears of the so-called U.S. fiscal cliff -- the $500 billion or so in expiring tax cuts and government spending reductions scheduled to take hold at the start of next year -- and Europe's long-running debt problems.

U.S. financial markets ignored the productivity data and traders took their cue from global developments.

MUTED WAGE PRESSURES

Businesses emerged from the 2007-09 recession lean and are showing little urgency to ramp up hiring, relying on their existing workers to meet production and keeping a tight hand on costs such as wages.

Unit labor costs -- a gauge of the labor-related cost for any given unit of output -- rose at a 1.5 percent rate in the second quarter rather than 1.7 percent, the report showed.

They were up only 0.9 percent from a year-ago, underscoring the lack of wage-related inflation pressures in the economy and helping to keep the door open to further monetary easing by the Federal Reserve to stimulate the economy.

Fed Chairman Ben Bernanke last week described the labor market's stagnation as a "grave concern," raising expectations among economists that the central bank's policy-setting Federal Open Market Committee would decide to pump more money into the economy at its September 12-13 meeting.

"On year-on-year terms, unit labor costs growth remains well contained, suggesting that the FOMC is unlikely to become concerned about upside inflation risks as it considers its policy options," said Yelena Shulyatyeva, an economist at BNP Paribas in New York.

Worker hours rose at a 0.1 percent rate in the second quarter, the smallest increase since the third quarter of 2009, while nonfarm output increased at a 2.4 percent pace.

(Reporting by Lucia Mutikani; Editing by Andrea Ricci and Tim Ahmann)