WASHINGTON - The productivity of American workers, the critical component for rising living standards, increased by 4.1 percent in 2004, capping a remarkable three-year period in which worker efficiency climbed at the fastest pace in a half century.
However, the Labor Department reported Thursday that productivity for the final three months of the year was up at an annual rate of just 0.8 percent, which was the slowest quarterly increase in almost three years.
The rapid gains in productivity began slowing in the July-September quarter when productivity rose by just 1.8 percent after increases of 3.7 percent in the first quarter and 3.9 percent in the second quarter last year.
On Wall Street, the Dow Jones industrial average was down about 30 points in late morning trading as investors worried that the sharp slowdown in productivity gains over the past six months will fuel inflation fears at the Federal Reserve, prompting policy-makers to begin moving rates up faster. There have been six quarter-point increases since June.
But private analysts said productivity growth, while slowing from the supercharged rates of the past three years, should remain at healthy levels through 2005.
"We should see productivity settle in at rates just above 2 percent, which will be a solid level consistent with low inflation and low interest rates," said Mark Zandi, chief economist at Economy.com.
Productivity, the amount of output produced for each hour of work, is the key factor in boosting living standards because it allows companies to pay their workers more based on their increased efficiency without having to resort to raising the price of their products, which would increase inflation.
Productivity rose by 4.4 percent in both 2003 and 2004. The 4.3 percent average annual gain for the past three years was the strongest productivity performance in more than a half-century of record keeping. The only three-year period that came close to that performance was a 4.2 percent average turned in from 1949 through 1951.
The downside of that increased efficiency is that companies, by getting more output from their existing work force, are able to avoid hiring new workers.
That is what occurred during the recession year of 2001 and the following two years in which job losses mounted as companies, pressed by increased global competition, strove to get increased production from slimmer work forces.
In other economic news, the nation's retailers reported solid sales in January as consumers braved late-month snowstorms in the Midwest and Northeast to head to the shopping malls.
In another report, the Commerce Department said Thursday that orders to U.S. factories shot up a record 11.1 percent for all of 2004 despite the fact that order growth slowed to a modest 0.3 percent rise in December.
The December increase was the weakest showing since no increase in September. It reflected a 1.1 percent rise in orders for durable goods, which was revised up from a preliminary estimate of 0.6 percent, and a 0.6 percent decline in orders for non-durable goods, items not expected to last at least three years.
The 11.1 percent surge in factory orders for the year was the biggest gain on record, besting the previous high of 8.1 percent set in 1994. It followed four lackluster years as U.S. manufacturers suffered the loss of 2.9 million factory jobs since mid-2000.
Meanwhile, the Labor Department said that the number of newly laid-off workers filing claims for unemployment benefits totaled a seasonally adjusted 316,000 last week, a decrease of 9,000 from the previous week, pushing new claims to the lowest level since early December. Claims had risen by 7,000 the previous week after having plunged by 49,000 for the week ending Jan. 15.
The decline of 9,000 jobless claims last week represented a better-than-expected showing. Many analysts had been forecasting not a drop but an increase of about 5,000 in new claims being filed. The four-week moving average of claims dipped to 331,500, the lowest level since early January.
For all of 2004, employment grew by 2.2 million workers, the first annual gain after three years of job losses as the country struggled to cope with the 2001 recession and a jobless recovery that reflected in large part the ability of U.S. companies to get more output from a smaller work force.
The productivity report also showed that output rose by 2.8 percent in the fourth quarter while the number of hours worked was up by 1.9 percent.
The 0.8 percent increase in productivity for the fourth quarter was the weakest showing since a 0.4 percent drop in the first three months of 2001. The slowdown in productivity growth meant that unit labor costs climbed by 2.3 percent in the fourth quarter, the biggest jump since a similar increase in the April-June quarter of 2002.
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