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December 6, 2000

Productivity Rate Is Revised Downward To 3.3% as Labor Costs Advance 2.9%
By The Wall Street Journal

Productivity Slows To A Crawl - Greenspan Must Rethink Yesterday's Remarks ... Weiss comments

WASHINGTON - American workers were less efficient on the job in the third quarter than previously thought, while labor costs accelerated at the fastest pace in more than a year.

Nonfarm productivity rose at a 3.3% annual rate in the third quarter, down from an earlier estimate of 3.8%, the Labor Department reported Wednesday. In the second quarter, productivity growth was much more impressive, surging at a 6.1% clip.

Federal Reserve Chairman Alan Greenspan has warned that rising productivity could not always keep inflation pressures at bay and in June 1999 the central bank adopted the first of six interest rate increases to slow economic growth and achieve a "soft landing" for the economy.

As productivity growth slowed, employers' costs rose last quarter. Unit labor costs, a key measure of wage pressures, rose at a 2.9% clip in the third quarter, up from the previous estimate of 2.5%. The latest figure is the fastest rate since the second quarter of 1999. Economists surveyed by Thomson Global Markets expected an increase of 2.8%.

Hourly compensation costs rose 6.3% on an unadjusted basis and 3.1% after adjusting for inflation, slightly lower than the government's previous estimates. Still, unadjusted compensation hasn't grown that fast in more than eight years.

Nonfinancial corporations, which Mr. Greenspan has cited as an accurate gauge of broader productivity trends, saw slower productivity growth last quarter, rising at 4.9% pace compared with a 5.4% clip in the second quarter. Increases in unit labor costs at nonfinancial firms held steady at 2.6% in the third quarter.

Wednesday's report came a day after Mr. Greenspan signaled that the central bank may abandon its tilt toward higher interest rates, though he didn't promise to cut rates anytime soon. Mr. Greenspan said that productivity growth has cooled from the second quarter, though he added that continued investment in technology is likely to power efficiency increases in the years ahead.

Sturdy gains in productivity, largely attributed to technological innovations, have helped boost how fast the economy can grow without triggering inflation. Through the 1990s, the economy generated efficiency gains of around 2%. For the past two years, however, productivity growth has come in around 4%.

But maintaining that pace of productivity growth in an economic slowdown may prove difficult, economists say.

Today's productivity and labor cost numbers clearly show that the economic slowdown does not signal an end to inflation. Productivity growth is barely outpacing the rise in labor costs. And there is increasing evidence that wage pressures will only increase, while spending on productivity-enhancing equipment has fallen off sharply.

Many technology workers are no longer willing to accept stock options in lieu of salary. They're demanding the big bucks up front, so that raises compensation costs for employers. Plus, there is a huge push among Internet company employees to unionize so that they can negotiate for better benefits and severance packages if their company goes out of business, as so many dot-coms have done lately. The unemployment rate may soften from its 30-year low of 3.9%, but wages and compensation costs will rise meteorically and inflation will continue to build.

Businesses have also stopped investing in equipment and software that could help productivity offset inflationary pressures. In the third quarter, spending on new equipment and software crawled along at an annual pace of 5.8 percent, down from the 17.9 percent and 20.6 percent rates that were required to stem ever-rising inflationary pressures in the first two quarters. With this sharp drop-off in productivity investment, rising wages will certainly spur inflation.

Fed Chairman Alan Greenspan is probably wishing that he had kept his mouth shut yesterday. Numbers like this hardly call for an easing of the bias towards inflation. In fact, the Fed may take these numbers as a signal to raise rates.

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