Worker output plunges
By George Hager, USA TODAY
The slumping economy has badly wounded one of Federal Reserve Chairman Alan Greenspan's favorite economic indicators, forcing at least a temporary halt in the USA's dazzling productivity boom.
Productivity outside of farms - American workers' output per hour - plummeted in the first three months of the year, the Labor Department reported Tuesday. It shrank 0.1% at an annual rate after rising 2% in the final quarter of last year and soaring 6.3% last spring. It was the first drop in six years and surprised economists, who had expected a 1% increase.
At the same time, unit labor costs soared 5.2% as wage pressures left over from last year's tight labor market kept escalating employee compensation.
President Bush remains "very concerned" about the state of the U.S. economy, the White House said, calling the drop in productivity "an additional sign of weakness." In response to that weakness, the Fed is widely expected to cut rates another half-point when it meets next Tuesday.
On the surface, the numbers are ugly. The labor cost increase could provoke companies to try to raise prices, which could boost inflation.
The productivity drop was not what economists wanted to see. The ability of companies to raise worker productivity by using computers and other technology to squeeze more output from every hour worked has been crucial fuel to the 10-year economic expansion.
Large productivity increases help keep inflation at bay because companies can pay workers more without raising prices, thus generating rapid increases in the standard of living.
The productivity slump was not entirely unexpected. Productivity typically weakens when the economy does, as the growth in companies' output slows more rapidly than they can lay off workers.
Greenspan said in a speech a week and a half ago that there was "no doubt" productivity would endure a "period of weakness" as the economy slowed. However, he said there was "little in the recent data" to suggest that the slowdown would change long-term forecasts for strong productivity growth.
Some economists fear the productivity slump could be a longer-lasting result of the equally abrupt drop in business investment in the high-tech goods that helped fuel the productivity gains in the first place. But even worriers say it is too soon to tell, and most analysts say the slump is only temporary.
"The productivity slowdown was a one-time cyclical affair due to the malaise that has engulfed the economy since last summer," says Jerry Jasinowski, president of the National Association of Manufacturers.
Nor is there broad fear that rising labor costs will spark inflation. Wage pressures likely will slacken as the economy slows and layoffs continue.
"The Big Sleep will cool those demands," says Ken Mayland of ClearView Economics.
And the slowing economy will make it tough for companies to raise prices.
"Corporations do not appear to have the ability to pass on costs," Bear Stearns said in an e-mail to its clients. Instead, labor costs will likely squeeze profit margins and prompt more layoffs - more bad news for workers. |
