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US productivity growth seen slowing in Q4

Economists expect data to show a rise of just 0.5%

(NEW YORK) US worker efficiency probably grew in the fourth quarter at the slowest pace in more than a year, pushing up labour costs, economists said before a government report yesterday.

Productivity, a measure of how much an employee produces for each hour of work, rose at an annual 0.5 per cent rate following a 6.3 per cent pace from July through September that was the highest in three years, according to the median estimate of 71 economists in a Bloomberg News survey.

Businesses are trimming staff to stem the slowdown in productivity and to control labour expenses to avoid having to raise prices. Federal Reserve policymakers are counting on a slowdown in inflation to be able to keep cutting interest rates to stave off a recession.

‘The pace of efficiency gains likely slowed substantially in the fourth quarter as economic activity stalled,’ Stephen Stanley, chief economist at RBS Greenwich Capital in Greenwich, Connecticut, said before the report.

The Labor Department’s report was due later in the day in Washington. Estimates in the Bloomberg survey ranged from a drop of 0.6 per cent to a gain of 2.7 per cent.

Labour expenses probably rose at a 3.5 per cent rate in the fourth quarter, after dropping at a 2 per cent pace in the previous three months, according to the survey median. Estimates for labour costs ranged from increases of 1 per cent to 5 per cent.

Productivity gains may be harder to come by as the economy weakens because businesses are usually slow to reduce staff, economists said.

Economic growth slowed to an annual rate of 0.6 per cent in October through December, down from a 4.9 per cent pace in the third quarter, according to government figures last week. A report from the Institute for Supply Management on Tuesday showed that service industries unexpectedly contracted in January at the fastest pace since the 2001 recession.

Still, some businesses have already reacted to the demand slowdown in order to contain costs. Companies added 1,000 workers to payrolls in January, down from 54,000 the previous month, and government agencies reduced staff. The economy lost 17,000 jobs overall, the first decline in more than four years. Hourly wages rose 0.2 per cent last month, less than economists had forecast.

Labour expenses account for about two-thirds of the cost of producing a good or service.

Less growth and fewer price pressures will allow Fed policymakers to keep cutting the benchmark rate, economists said.

Central bankers lowered the benchmark rate by half a percentage point on Jan 30, following an emergency threequarter- point reduction a week earlier. Investors are betting on another half-point cut at or before the next meeting in March, according to futures trading.

Some economists are concerned that the productivity surge that began in 1996 is waning. Efficiency increases have slowed every year since reaching a peak of 4.2 per cent in 2002. Productivity rose just 1 per cent in 2006, the smallest increase since 1995.

 

Source: Bloomberg (Business Times 7 Feb 08)

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