February 8, 2001

US Productivity Growth Slows
By Peronet Despeignes, The Financial Times

Productivity Derailed, But Inflation Chugs On ... Weiss comments

WASHINGTON - Growth in the productivity of the US workforce slowed in the fourth quarter of last year, amid the abrupt slowdown in US demand for goods and services, but not as quickly as many economists had expected.

The US Labor Department said on Wednesday that non-farm productivity growth - the rise in output per man-hour - slid to a 2.4% annual rate in the fourth quarter from a downwardly revised 3% gain in the third quarter.

It was the slowest rise in almost a year but enough to make productivity growth for all of 2000 the fastest since 1983.

Many economists had expected fourth-quarter growth below 2%, but the slowdown in output was accompanied by the sharpest cutback in man-hours in five years amid heavy corporate layoffs.

"It shows how serious and how committed US firms are to maintaining productivity," said Doug Porter, senior economist at the Bank of Montreal. "If there was any doubt on that front, these numbers erase it."

But the report also showed a big jump in worker pay, which helped push labor costs per unit up an annualized 4.1%, compared with the third quarter's 3.2% gain

The rise in unit labor costs, widely viewed as a barometer of inflationary pressures and a drag on profit margins, was the largest since the second quarter of 1999, ending a year in which they grew at the slowest pace in more than ten years.

"We're no longer in the wonderland of weak labor costs," Mr. Porter said. But the surge in labor pay "may well mark the peak" and in the competitive US market "it's more a concern for profit margins, than inflation," he said.

Some analysts predict the end of the boom in business investment and labor hoarding amid the slowdown will sharply depress productivity gains, at least temporarily, but others, including Federal Reserve Chairman Alan Greenspan predict strong productivity gains will persist over the long run.

The rapid productivity growth of the past few years has gone the way of the bull market. The outlook for productivity growth in 2001 is weak at best. That's because business confidence has dropped even faster than consumer confidence lately, and investment in productivity-enhancing equipment such as new computers and software has taken a nosedive. As the economy tailspins into a recession, productivity growth will also dive into negative territory.

But what's more alarming about the latest productivity report is that rising labor costs show no signs of slowing down. In fact, they're more like the Energizer bunny - they keep going and going. Last quarter, unit labor costs (adjusted for productivity) jumped 4.1%. Hourly compensation (which includes wages, salaries, benefits, and taxes) rose 6.6%. Higher labor costs translate into lower profit margins for businesses AND inflationary pressures on the economy. And that means company earnings will continue to plunge even as the Fed has a harder time justifying interest rate cuts with inflation on the rise.

Investors have continued to bid up stock prices in spite of disappointing company earnings because they are counting on the Fed's willingness to slash rates before the March meeting. But with inflation steadily on the rise, the Fed will certainly have to think twice before "surprising" the market with an inter-meeting rate cut. And without it, investors will dump their overpriced stocks.

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