Productivity rises by solid 2.6 percent

WASHINGTON - Productivity, a key factor needed to boost living standards, rose at an annual rate of 2.6 percent in the first three months of the year. It was the best showing in nine months but still below the huge gains of recent years.

The Labor Department reported Thursday that the increase in productivity, a measure of worker efficiency, compared to a 2.1 percent rate of increase in the October-December quarter of last year.

It was a slightly better gain than economists had been expecting and represented the fastest increase since a 3.9 percent jump in the April-June quarter of last year.

However, productivity gains since the third quarter of last year have been decidedly lower than the increases that occurred as the economy was pulling out of the 2001 recession. During that time, employers were able to boost output without hiring back laid off workers.

However, many analysts said they believed productivity gains will be more subdued going forward because companies have exhausted much of the increased output they can get from the existing workforce and will start hiring new workers.

Federal Reserve Chairman Alan Greenspan, speaking by satellite to a conference in Chicago, said he believed there was still a "significant amount" of technological innovation that can be tapped to yield productivity gains.

"We know there is going to be increased innovation and increased productivity," he said, but the Fed chairman also said that forecasting exactly when it will occur is difficult.

With the solid increase in productivity - the amount of output per hour of work - unit labor costs rose by a moderate 2.2 percent in the first three months of the year. That was up slightly from a 1.7 percent rise in unit labor costs in the fourth quarter but far below the 4 percent surge in the third quarter of 2004.

But Steve Stanley, chief economist at RBS Greenwich Capital, said that over the past year, unit labor costs have stopped declining as they did in 2002 and 2003, and are now edging higher. He called this "another reason for the building concern among central bankers about inflation risks."

On Wall Street, stocks were slightly higher in late morning trading on Thursday with the Dow Jones industrial average up about 2 points.

In other news, the number of Americans filing new claims for unemployment benefits rose for to 333,000 last week, reflecting a larger-than-expected rise of 11,000 benefit applications from the previous week. It was the second straight weekly increase following a rise of 22,000 the previous week.

However, the four-week moving average, considered a better indicator of trends, fell by 2,000 to 321,500 last week, a level that analysts believe shows the labor market is still improving.

Economists believe that even with the recent economic slowdown, Friday's employment report will show an increase of 175,000 jobs in April, up from an increase of 110,000 jobs in March.

Meanwhile, the nation's retailers reported mixed sales results in April, continuing a lackluster trend that began in March. Wal-Mart Stores Inc., the country's biggest retailer, reported that sales at stores open for at least a year, were up 0.9 percent last month, slightly below the 1 percent rise expected by Wall Street analysts.

The slowdown in consumer spending has been blamed on the jump in energy prices this year and has raised worries about a repeat of last year's "soft patch" in economic growth.

Productivity, which performed sluggishly for the two decades following the oil shocks of the early 1970s, picked up signficantly in the later stages of the country's record-breaking economic expansion of the 1990s.

The performance of productivity is significant because if more goods and services can be produced in the same amount of time, then businesses can pay their employers more without raising prices or cutting into their profits.

However, some economists are worried that the boom in productivity that occurred beginning in 1995 is starting to slow.

While the increase in productivity for all of 2004 was 4.1 percent, that reflected strength in the first half of the year. Starting in the third quarter, productivity slowed to 1.3 percent and turned in a gain of 2.1 percent in the fourth quarter, far felow the gains of 3.8 percent in the first quarter and 3.9 percent in the second quarter.

However, other analysts agree with Greenspan that the productivity rebound that began a decade ago has not yet run its course.