* U.S. output per worker shrinks in spring quarter
* Business sales down, consumer optimism fading
* Fed cites multiple signs of slowing economy
(Updates with Fed decision, comments on the economy; market
By Glenn Somerville
WASHINGTON, Aug 10 U.S. business productivity
fell for the first time in 1-1/2 years in the second quarter
and labor costs hardly rose, underlining the halting pace of
Productivity declined at an annual rate of 0.9 percent
after rising at a revised 3.9 percent pace in the first
quarter, the Labor Department said on Tuesday.
It was the first drop in productivity, or hourly output per
worker, since the fourth quarter of 2008 and suggested
corporate profits could start coming under pressure.
The report also suggested business may have to step up
hiring in order to keep expanding production.
"If working people longer and harder is no longer bringing
large returns to businesses, executives may have to find other
ways to expand production," said economist Joel Naroff of
Naroff Economic Advisors in Holland, Pennsylvania.
"They might actually have to hire more workers," he said.
The drop in productivity reflected a step-up in the total
number of hours worked and a slower pace of economic growth.
The Federal Reserve on Tuesday took note of the softening
economy and announced new plans to keep borrowing costs low by
reinvesting proceeds from mortgage-related debt it holds.
The announcement helped stocks cut losses and gave bond
prices a decided lift by assuring markets the Fed will try to
jump-start more vigorous growth and that it will do so partly
through more debt purchases.
By using the proceeds to buy more government debt, the U.S.
central bank effectively prevents money from draining out of
the financial system and so keeps it available to borrowers.
All of Tuesday's data was downbeat and the Fed reconfirmed
it will keep interest rates near zero "for an extended period"
-- a bid to reassure investors it will continue to backstop the
economy with cheap credit.
Other reports showed consumers were growing increasingly
gloomy about the outlook, as well as a rise in inventories held
by wholesalers faced with slumping sales.
INCOMES UNDER PRESSURE
The productivity report showed employers pushed the hours
worked by employees up at a 3.6 percent annual rate in the
second quarter, more than triple the first-quarter increase. It
was the sharpest rise in hours worked in more than four years.
Any major pickup in hiring may be months away, however,
since businesses still seem intent to cut costs while assessing
whether consumer demand will pick up.
Unit labor costs, a gauge of potential inflation pressures
closely watched by the Fed, edged up at a 0.2 percent annual
rate after shrinking at a revised 3.7 percent rate in the first
three months this year.
But the data pointed to growing pressure on household
incomes, which in turn is likely to crimp spending that fuels
overall economic activity. Compensation per hour contracted at
a 0.7 percent annual rate in the second quarter and was flat in
the first three months of the year.
Some Fed officials worry that with unemployment stuck at a
lofty 9.5 percent, employers will seize the chance to push
wages down for those still working and prices will come under
pressure, possibly triggering a round of punishing deflation.
Productivity, labor costs- link.reuters.com/byk34n
SALES SLUMP MEANS LESS REBUILDING
A Reuters survey of 250 economists in major economies,
published on Tuesday, found that most think strong growth in
key emerging economies like India and China will cushion the
global economy from a major downturn, though they expect U.S.
growth to soften.
Two-thirds of analysts said they have downgraded their U.S.
growth forecasts for the second half of this year -- now
pegging median growth at 2.9 percent for 2011 instead of 3
percent estimated earlier -- but only 15 percent saw the U.S.
economy slipping back into a double-dip recession.
Separately, the Commerce Department said June wholesale
inventories rose 0.1 percent as sales dropped 0.7 percent.
Inventory restocking has been a driver of the recovery from
the worst recession in decades, but it already seems to be
waning and weak sales will do little to encourage more
Economist Mike Englund of Action Economics LLC called the
inventories data "ugly" and said it "took a further chunk out
of second-quarter GDP growth." He said GDP likely expanded only
2 percent in the second quarter rather than the 2.4 percent the
government estimated at the end of July.
A gauge of consumer confidence, the Investor's Business
Daily and TechnoMetrica Market Intelligence Economic Optimism
Index, slipped to 43.6 in August from 44.7 in July. A reading
under 50 signals pessimism and one over 50 is optimistic.
(Additional reporting by Emily Kaiser in Washington and Ciara
Linnane in New York; Editing by Dan Grebler)