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To: Wally Mastroly who wrote (10671)	11/2/2000 9:12:24 AM
From: Wally Mastroly	Respond to of 42834

3Q Productivity rose at slower pace than prior 3 months, but labor costs accelerated more than expected: By Siobhan Hughes Washington, Nov. 2 (Bloomberg) -- The productivity of American workers rose in the third quarter at a slower pace than the prior three months, while labor costs accelerated more than expected, a government report showed today. Productivity, a measure of worker output for every hour on the job, rose at a 3.8 percent annual pace in the third quarter after a revised 6.1 percent second-quarter rate, the Labor Department said. Businesses reduced worker hours as output slowed in the third quarter. Compensation per hour worked rose at the fastest pace since the first quarter 1992, Labor officials said. That could concern Federal Reserve policy-makers, who have signaled they see productivity gains continuing to offset labor costs. ``The jump in compensation costs is a major disappointment,'' said Mark Vitner, senior economist at First Union Corp. in Charlotte. The report suggests ``as the economy slows inflation will likely increase and the Fed will likely be forced to keep policy on hold.'' Unit labor costs, a gauge of wages per measure of output, rose at a 2.5 percent annual rate in the third quarter after falling at a revised 0.2 percent rate in the second. The third- quarter increase in labor costs was the largest since a 4.3 percent jump in the second quarter of last year. Compared with last year's third quarter, labor costs rose 0.1 percent after falling 0.4 percent in the second three months of the year. Analysts expected a 3 percent rise in productivity for the third quarter and a 1.5 percent increase in unit labor costs. Surge in Compensation A 6.4 percent annual rate of increase in compensation per hour was the largest since an 8.8 percent surge in the first quarter 1992. Compared with the same quarter a year ago, compensation rose 5.1 percent after 4.9 percent in the second quarter. Compared with the third quarter of last year, productivity rose 5 percent, outpacing a 3.5 percent rise in inflation over the same period. Productivity is a key reason the economy has been able to grow faster without causing inflation to accelerate. As companies invest in equipment to automate business processes, workers can boost output without working longer hours. That lets companies raise wages without raising prices. Gross domestic product has grown in excess of 4 percent in each of the last three years at the same time inflation, as measured by the GDP deflator, has increased no more than 1.9 percent a year. The single most important reason the U.S. economy is so strong ``is the dramatic acceleration in productivity growth,' said Fed Governor Laurence Meyer in a speech last week in Wisconsin. If productivity growth can continue at current rates that would be ``profound'' for the economy, he said. Productivity at Non-Financial Firms Productivity at non-financial corporations, a measure watched closely by Fed Chairman Alan Greenspan, rose at a 5.4 percent pace in the second quarter, compared with a 2.9 percent annual pace in the first. Total worker output grew at a 3 percent rate in the third quarter, up from a revised 6.5 percent rate in the second quarter. The number of hours worked declined at a 0.8 percent rate in the third quarter after a 0.4 percent rate in the second quarter. The government measures productivity in effect by measuring the gross domestic product of private businesses and dividing by the number of hours those businesses report their employees worked. The implicit price deflator -- a measure of inflation tied to the productivity report -- increased at a 1.8 percent annual rate in the third quarter, from a 2 percent rate in the second quarter. Raising Prices to Cover Costs Quorum Health Group Inc. contributed to the rise in costs. The biggest U.S. manager of non-profit hospitals, raised prices about 5 percent to 7 percent in the quarter ended Sept. 30, from the same period a year earlier. That more than covered a 4.4 percent increase in wages over the same period. The drop in productivity was assured because gross domestic product, or total output, rose at a 2.7 percent annual pace in the third quarter, down from a 5.6 percent rate in the second quarter, the Commerce Department reported last week. When output rises at a slower pace while hours worked show little change, productivity be definition declines. At issue is whether the smaller gains in productivity will continue. One negative sign was a report last week showing business investment in equipment and software -- which enhance productivity -- slowed to a 8.5 percent pace of growth in the third quarter, down from a 17.9 percent second-quarter rise. That dims the outlook for productivity. ``We did see a little more slowdown in investment spending in the third quarter,'' said Tim McGee, chief economist at Tokai Bank Ltd. in New York. ``That does raise some questions about the sustainability of the pick-up in productivity.'' Corporate Earnings Corporate earnings have also taken a hit, suggesting some companies are having trouble minimizing the effects of higher wage and raw materials costs with productivity gains. Rohm & Haas Co., one of the largest specialty chemicals makers, said last month it expects lower-than-expected profits because of higher raw materials costs. However, economists expect the economy's growth rate to rebound in the fourth quarter. Consumer spending rose at a 4.5 percent annual pace in the third quarter from a 3.1 percent rate in the second quarter, setting the stage for a pick-up in economic growth during the holiday shopping season, analysts said. That could boost productivity. What's more, Fed Chairman Alan Greenspan is optimistic that productivity gains can continue. ``As best we can judge, credible evidence that the rate of structural productivity growth has stopped increasing is still lacking,'' said Greenspan in a speech last month at a Cato Industry conference in Washington.