It seems too early for the "Viagra Factor" to have an impact on the economy, but maybe not. An article about the drop in productivity gains:
< THE 0.2 PERCENT first quarter increase followed a revised 1.4 percent advance in the final three months of 1997. For all of 1997, productivity had risen by 1.7 percent.
The new report on productivity represented a setback for arguments that the U.S. economy has entered a new era - in which a surge in productivity powered by greater use of computers will help to power living standards in the years ahead.
However, analysts cautioned against reading too much into a single three-month period, stressing that it can take years to determine a trend in productivity.
"The new era argument for the economy is still alive but it is getting a little shaky with the most recent developments," said Robert Dederick, economist at Northern Trust in Chicago.
But Dederick noted that even with the slowdown in the first quarter, productivity over the past 12 months has risen by 1.9 percent, a sharp improvement over the trend of the past quarter century.
American productivity posted average annual increases of nearly 3 percent in the 1960s and early 1970s, helping to lift American wages and living standards. But since 1973 and the Arab oil embargo, productivity has slowed sharply, with gains average little better than 1 percent a year.
But there has been a slight uptick in productivity in the past two years. It rose 1.7 percent last year and 1.9 percent in 1996, still far below the 3 percent gains of the 1960s but better than the 1 percent average since 1973.
Sluggish productivity since 1973 has been blamed for a host of economic problems, including widening economic inequality, slipping purchasing power and the demands that more women work outside the home to support their families.
The pickup of the past two years could help explain why unemployment has fallen to such low levels without boosting inflation. If productivity is rising, employers can pay higher wages without being forced to raise prices.
But for the first three months of the year, unit labor costs - a key barometer of inflation pressures - rose 3.8 percent in the January-March quarter, matching the 3.8 percent rise in the final three months of 1997. That increase was the worst since the third quarter of 1996.
The Federal Reserve closely watches unit labor costs - the amount of wages per unit of output - as a signal of inflation pressures.
In a second report Thursday, the Labor Department said that unemployment claims fell by 11,000 last week to 308,000, an unexpectedly large decline that provided new evidence of the strength of the U.S. economy.
The Federal Reserve, which will meet in two weeks to review interest rates, has been expecting the adverse effects of the Asian crisis to slow economic growth to a slower pace from the sizzling 4.2 percent growth rate turned in during the first three months of the year.
However, various recent indicators have shown unexpected strength, raising concerns in financial markets that the Fed may soon be forced to start raising interest rates to slow U.S. growth and keep inflationary pressures at bay.
The big slowdown in productivity was attributed to the fact that while output increased in the first quarter, the number of hours worked jumped as well. Hours worked rose at an annual rate of 5 percent in the first quarter, the fastest increase since the second quarter of 1994.
Financial markets have been on a roller-coaster ride in recent weeks, setting new records on days when economic reports indicate that the Fed will not be forced to raise interest rates and retreating on days when economic reports indicated new-found economic strength, raising doubts about how much longer the central bank will be content to leave rates unchanged.
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Summary: Viagra heading up, economy going limp.
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