Productivity weakens in second quarter

WASHINGTON (Reuters) - 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 economic recovery.

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.

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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.

A worker tends yarn-spinning equipment at a Parkdale Mills plant in Walnut Cove, North Carolina, in this photo taken June 15, 2010. REUTERS/Scott Malone


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.


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 stockpiling.

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