Productivity Robust as Workers Feel Pinch
Wednesday February 6, 1:15 pm Eastern Time
By Mark Egan
WASHINGTON (Reuters) - The productivity of U.S. workers grew at an unexpectedly brisk pace in the final three months of last year as companies cut the hours their employees worked at the fastest clip in more than a decade to try to regain footing amid a recession.
High rates of productivity growth were a key reason the U.S. economy enjoyed its longest-ever expansion until the recession began last March, and economists said the strong showing augured well for a solid recovery even while increasing the pinch felt by American workers.
The Labor Department said productivity, or worker output of goods and services per hour outside of the farm sector, grew at an annual rate of 3.5 percent in the October-to-December period after a revised 1.1 percent gain in the third quarter. The fourth-quarter rise was stronger than the 2.9 percent gain forecast by economists in a Reuters poll.
Rick Egelton, deputy chief economist at Bank of Montreal/Harris Bank in Toronto, said the report showed ``a stunning performance'' on the productivity front.
``Typically when an economy is struggling, productivity growth tends to be weak,'' Egelton said.
``In contrast, we have recorded a very strong productivity number which suggests that over the long term, once the U.S. economy fully recovers from recession, we can look forward to a continued strong productivity performance.''
U.S. Treasury Secretary Paul O'Neill welcomed the data.
``The U.S. economy has demonstrated that we can achieve remarkable productivity under the most difficult circumstances,'' O'Neill told a congressional hearing.
Usually productivity declines during an economic downturn as output usually falls faster than hours worked.
But productivity has held up remarkably well during the latest recession, posting gains in every quarter of last year with the exception of the first three months, as firms adjusted to the weak economy by cutting hours.
UNDERLYING STRENGTH
In late January, Federal Reserve Chairman Alan Greenspan said U.S. productivity data was indicative of the underlying strength of the world's richest economy and he expressed optimism on the future. ``I think productivity gains will continue, certainly in excess of what they did in the quarter century prior to 1995.''
Those productivity gains in recent years, buoyed by massive investment in information technology in the 1990s, were in many respects what spurred the U.S. economy to outpace Europe and many other regions on the growth front.
Strong productivity helped mute inflation since companies could produce more without substantial rises in costs even as wages rose. That in turn boosted corporate profits and attracted capital to U.S. markets.
But with the economy in recession, the latest report showed that for the full year nonfarm productivity advanced just 1.8 percent, the weakest annual showing since a 0.9 percent rise in 1995. The reading was well below the 3.3 percent productivity gain enjoyed in 2000.
In the final quarter of last year, the number of hours workers spent on the job fell 3.7 percent, the largest decline since the first quarter of 1991 when the economy was last in recession and hours worked fell 4.8 percent. The slide in the fourth quarter was the third consecutive quarterly drop in hours worked.
Unit labor costs, a closely watched gauge of wage pressures, rose 3.9 percent last year, the biggest annual rise in labor costs since a 4.3 percent gain in 1990.
While rising for the year, unit labor costs fell at a 1.1 percent annual rate in the fourth quarter, the largest decline since a 2.9 percent drop in the final quarter of 1999. Economists had expected unit labor costs to increase at a 0.7 percent pace in the October-to-December period.
PROSPECTS FOR RECOVERY GOOD
``With productivity holding up and labor costs under control, the prospects for a recovery of both the economy and profits look good,'' said Joel Naroff of Naroff Economic Advisors in Holland, Pa.
Last week, the Federal Reserve suspended one of the most aggressive easing campaigns in its history, in which it ratcheted the key lending rate down 11 times during 2001 for a total reduction of 4.75 percentage points.
The powerful central bank said it was encouraged by the prospects for long-term productivity.
Naroff said with productivity so strong, the Fed can concentrate on the prospect of recovery, giving it ``some extra freedom to wait a little longer before raising rates.''
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Productivity Surges, No Thanks To Tech
By Penelope Patsuris
Forbes.com
Wednesday February 6
Here's another blow to the technology industry's ego: Productivity surged to 3.5% in the fourth quarter of 2001, according to the numbers released this morning by the Department of Labor. The post-1995 boom in U.S. productivity had been attributed largely to advances in the high-tech sector, and, given the tech slump (to say nothing of the recession), might rightly have been expected to drop. Instead we have a result that puts the third quarter's 2.6% rate to shame.
This morning's numbers from the Department of Labor don't tell us precisely who the country's hardest workers are--breaking the stats into only three broad categories: manufacturing, total nonfarm and business. But the business sector turned in a stunning 3.4% growth in productivity, up from 0.7% for the third quarter.
"In 1995 through 2000, manufacturing was the leader in productivity, but now it seems to have spread more broadly," says Brookings Institute analyst Barry Bosworth. "So this is not a tech story anymore." Productivity for the manufacturing sector, which includes tech, grew just 1% in 2001, compared to 6.1% growth in 2000. The fact that productivity is up even when manufacturing is down may suggest that this productivity growth is not cyclical.
Indeed, Bosworth argues that today's numbers suggest that the phenomenon could be more durable, reflecting a more rooted shift in the economy. "In the midst of a recession we expected to see slower productivity growth," he says.
If these numbers do reflect a real change in the economy, continued consistent productivity growth will ultimately lead to an even higher standard of living for Americans. "On average people are already living in houses with more square footage than ever, with two or three bathrooms when one used to be standard and they're driving giant SUVs," says Bosworth.
The government productivity numbers that promote this way of life simply measure economic output per worker. What's particularly remarkable about this quarter is that output decreased just 0.4% while worker hours dropped a whopping 3.7%. "Firms were clearly employing labor they didn't need," says Frank Lichtenberg, a professor of economics and finance at Columbia Business School. "Usually in a recession, output falls much more than employment, but companies don't hang onto workers when times are tough anymore. They're trigger-happy."
Putting people out of work may sound counter to increasing America's overall standard of living. But Brookings Institute analyst Gary Burtless argues that workers are simply being allocated better. "They're gradually being shifted from companies with poor outlooks to companies with good ones," he says, even if workers aren't finding new jobs right away.
And that's good news, says Burtless. "If you have more workers in companies that are seeing more demand for their products, that raises average productivity--and will raise our standard of living." |
