03/06 08:30
U.S. 4th-Qtr. Productivity Rises at Revised 2.2% Annual Rate
By Siobhan Hughes
Washington, March 6 (Bloomberg) -- U.S. productivity slowed in the fourth quarter as the economy cooled, not enough to keep worker output per hour last year from its best performance since 1983, a revised government report showed today.
The measure of how much an employee produces for every hour worked grew at a revised 2.2 percent annual rate in the fourth quarter, the Labor Department said. While slower than the 3 percent pace in the third quarter and less than the 2.4 percent rate previously estimated, it rose 4.3 percent last year.
That was the best since a 4.5 percent jump in 1983 and evidence that years of business investment in computers and management systems are helping employees stay efficient even as the economy cools.
The economic slowdown is ``keeping companies on their toes, making them respond faster and smarter,'' said Ken Mayland, president of ClearView Economics LLC in Pepper Pike, Ohio, before the report. That helps explain why productivity ``is down but not out.''
Analysts surveyed by Bloomberg News had expected a 2 percent pace of increase in fourth-quarter productivity and a 4.4 percent rate of increase in unit labor costs.
The economy grew at a 1.1 percent annual rate in the fourth quarter, the slowest in 5 1/2 years and half the 2.2 percent pace of increase in the prior three months.
Slower growth meant a surge in unit labor costs. The measure of wages and other expenses tied to productivity rose at a 4.3 percent annual rate in the fourth quarter, compared with a 3.2 percent pace of increase in the previous three months and faster than the 4.1 percent rate originally estimated. The fourth-quarter increase was the biggest since a 5.5 percent rise in the fourth quarter 1997.
Labor Costs
The rise in labor costs has cut into profits at some companies. Gap Inc., the biggest U.S. clothing retailer, reported last week that profit fell 34 percent during the three months ended Feb. 3 as sales dropped, boosting payroll costs as a percentage of sales.
Gap Chief Executive Millard Drexler said the company has started a review of its expenses to search for ways to cut costs. That includes examining whether changes can be made to improve store productivity.
Still, for all of last year unit labor costs rose 0.7 percent last year, the smallest increase since 1996 when labor costs grew at a 0.5 percent pace. Unit labor costs rose 1.8 percent in 1999.
Cutting Worker Hours
Hours worked fell at a 1.4 percent annual rate in the fourth quarter, previously reported as dropping at a 1.1 pace. That's the biggest decline since a 2.3 percent drop in the first quarter of 1992 and compares with a 0.7 percent rate of decline in the third quarter.
Worker output rose at a 0.8 percent rate in the fourth quarter, previously reported as a 1.2 percent rate of increase. In the third quarter, worker output rose at a 2.3 percent rate.
For all of last year, hours worked rose 1.3 percent and output increased 5.7 percent.
Fourth-quarter compensation per hour rose at an unrevised 6.6 percent annual rate in the fourth quarter, the largest increase since the first quarter of 1992. That compares with a 6.2 percent growth pace in the third quarter.
The use of software and information technology and computers has helped double productivity gains in the last five years. Since 1995, productivity has risen at roughly a 3 percent annual rate compared with about a 1 1/2 percent rate of increase for the prior two decades.
Greenspan Optimistic
Federal Reserve Chairman Alan Greenspan has expressed optimism that the accelerated pace of productivity growth will continue. While productivity is ``likely to be coming down'' as the economy slows, ``the longer-term productivity numbers are going to be running at rates of increase above where they've been in the past,'' he said last week.
Alcoa Inc., the world's biggest aluminum maker, is evidence companies are striving to boost productivity. In February, Alcoa agreed to buy $300 million worth of software and related services from Honeywell International Inc. to standardize aluminum production at seven plants. The purchase is part of Alcoa's plan to cut $1 billion in costs by the end of 2003.
Darden Restaurant Inc., the owner of Red Lobster and Olive Garden, is using an Internet application to speed the time of determining where to locate new restaurants. The program, designed by SRC LLC of Orange, California, delivers demographic information to Darden's real estate directors, bypassing the need to contact the research department when making preliminary site decisions.
Labor Market
Many businesses have maintained productivity by cutting hours or firing workers outright. A.K. Steel Holding Corp., whose largest customer is General Motors Corp., and DuPont Corp.'s Herbert Automotive unit, which supplies paint for new cars, cut overtime as sales slowed.
Corning Inc., the No. 1 maker of optical fiber for telecommunications networks, on Thursday said it was firing 825 employees because of a sharp drop in spending by telecommunications customers. Nortel Networks Corp., the biggest maker of fiber-optic equipment, last month outlined plans to cut 10,000 jobs this year.
``Business are doing their absolute best make sure their profit squeeze is limited, and that's why they have to adjust as rapidly as they possible,'' said Joel Naroff, president of Naroff Economic Advisors in Holland, Pennsylvania, before the report.
There are signs a slowing economy may be keeping some businesses from buying the equipment and software necessary to sustain productivity gains. Oracle Corp., the No. 1 maker of database software, on Friday reported that some customers delayed purchases at the last minute to control their costs. Oracle said it would miss profit forecasts for its third quarter.
In the final three months of 2000, business investment in equipment and software fell at a 3.5 percent annual rate, the largest drop since the 1990-91 recession. In the third quarter, business investment rose at a 5.6 percent rate.
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