Revisions to temper rapid U.S. productivity growth

By Gilbert Le Gras - Analysis

WASHINGTON (Reuters) - A government gauge showing robust U.S. productivity growth in late 2006 will likely be trimmed when statisticians incorporate a hefty upward revision to the Labor Department's payroll employment count.

The government said on Wednesday the productivity of U.S. workers rose at a heady 3 percent annual pace in the fourth quarter after a 0.1 percent dip in the third.

But that data will be revised on March 6 and will take into account a big upward revision announced on Friday to the number of nonfarm workers on employer's payrolls last year.

In its largest-ever annual benchmark revision, the Labor Department ratcheted upward its measure of the March 2006 level of employment by 752,000 workers.

Acknowledging that more people were working, the department also pushed its December measure of aggregate weekly hours -- a gauge of total work effort -- up by a large 0.8 percent.

That means it took more hours than previously thought to meet demand, and that the productivity gains shown in Wednesday's report were likely overstated.

"This release did not incorporate the revisions to hours worked in the ... employment report," said Dean Maki of Barclays Capital in New York. "So productivity growth should be revised lower in next month's final release."

While the Labor Department said on Wednesday that productivity grew by 2.1 percent over the four quarters of 2006, Maki said it would probably acknowledge in March that productivity growth was a tamer 1.8 percent.

Productivity, or output per worker hour, is a measure of business efficiency that offers the U.S. central bank a sense of whether rising wages are putting pressure on inflation.

The preliminary fourth quarter productivity reading helped hold unit labor costs -- the costs associated with any given unit of production -- to a 2.8 percent gain over the past four quarters, down from the 3-percent-plus readings of the prior three quarters.

A weaker productivity reading would imply a faster rise in labor costs, which analysts said were already moving ahead fast enough to keep the Fed, which has warned of the risk of tight labor markets sparking inflationary wage gains, on edge.

"That underlying pace is likely a bit high for Fed comfort, since unit labor costs tend to be well correlated with core inflation over time," said Doug Porter, an economist with BMO Capital Markets in Toronto.

At the same time, productivity looks to be on a slowing trend, which suggests businesses are having an increasingly tough time eking out efficiency gains to cover rising costs.

In the fourth quarter, productivity stood 2.1 percent above its year-earlier level, a step down from the 2.5 percent gain seen in 2005 and the smallest increase since 1997.

"The 2006 productivity seems to be edging back down to trend levels and labor costs are rising. The Fed has to keep that in mind," said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania.