Productivity Inches Up

Productivity Inches Up

Productivity in the U.S. is five times that of Germany's. In the third quarter, U.S. productivity rose 5% over the same three months of 2002.

By Carlos Torres

Bloomberg News Service

WASHINGTON, D.C. - U.S. worker productivity grew at a 2.7% annual rate from October through December, less than a third of the previous quarter's pace, as employees worked more hours and companies boosted hiring to meet demand.

Productivity, a measure of how much an employee produces for every hour of work, slowed from a 9.5% annual rate in the third quarter that was the strongest since the first three months of 2002, the Labor Department said in Washington. Winter weather pushed up jobless claims last week after they matched a three-year low, a separate report showed.

Companies added 144,000 workers to their payrolls in the fourth quarter and hours worked rose the most in three years, suggesting businesses were no longer depending solely on efficiency gains to meet demand. Sales at retailers including Wal-Mart Stores Inc. and Limited Brands rose in January as customers bought more winter clothing and redeemed gift cards.

"We saw companies finally needing to increase the number of hours worked after cutting hours and workers through the prior three years," said Lynn Reaser, chief economist at Banc of America Investment Services in St. Louis, who correctly forecast the rise in productivity. "This is a trend we will likely see followed in 2004. Companies will need to ramp up hiring."

The economy will grow 4.6% this quarter, she estimates, after expanding at a 4% rate.

Businesses probably added 175,000 workers to their payrolls in January, the biggest increase since November 2000, according to the median estimate in Bloomberg News survey of economists.

Federal Reserve Governor Ben Bernanke said in a speech that economic growth of more than 4% this year "is not at all unreasonable." Productivity gains will hold down inflation and help give central bankers room to be patient with interest rates "over the next few months."

The rise in productivity was enough to cause unit labor costs, or the amount paid for each unit of production, to fall 1.3% at an annual rate last quarter. The drop was the third straight and follows a 5.6% decline.

Falling labor costs and rising sales are giving corporate profits a lift and may provide businesses with the means to boost hiring in coming months. Profits increased an average of 28.8% in the fourth quarter for the 347 companies in the Standard & Poor's 500 Index that had reported earnings by Feb. 3. The gain is the largest since a 30.3% increase in the third quarter of 1993, according to Thomson Financial.

"Corporate profits are rising fast and that normally is a predictor of companies willingness to spend on both equipment and new hires," said William Cheney, chief economist at John Hancock Financial Services Inc. in Boston. "We're getting the equipment purchases; now we just have to hope for the jobs."

Companies have slowed the pace of firings. The average number of Americans filing first-time applications for unemployment insurance claims fell last month, matching a three-year low, the Labor Department also reported today. Claims last week rose by 17,000 to 356,000, which may have reflected layoffs in the construction industry after snowstorms in parts of the country, a Labor Department spokesman said.

For all of last year, productivity rose 4.2% following a 4.9% gain in 2002. The two-year average was the largest since 1950-1951.

By keeping labor costs from rising, productivity improvements are helping to keep inflation low. Fed policy makers in late January cited tame inflation as a reason why they can be "patient" in holding their target interest rate at an almost 46-year low of 1%.

Because of stronger productivity, "we at the Fed were able to be much more accommodative to the rise in economic growth than our past experiences would have deemed prudent," Fed Chairman Alan Greenspan said in a Jan. 3 speech.

Productivity in the U.S. is five times that of Germany's, Europe biggest economy. In the third quarter, U.S. productivity was 5% higher than it was in the same three months of 2002. The year-over-year change in Germany was 0.9%.

Cisco Systems Inc., the world's largest maker of equipment to link computers, said sales rose 15% to $5.4 billion in the quarter ended Jan. 24, the most in three years. Productivity rose 6% during the quarter and is up 18% for the year, according to John Chambers, the company's chief executive.

That's bringing the San Jose, Calif.-based firm closer to the point where it will add additional staff. When sales exceed $700,000 per employee, "I will start hiring again," said Chambers.

Productivity gains last quarter pushed that mark to $632,000 per employee, according to Chambers.

The Treasury's 4 1/4% note maturing in November 2013 fell 1/2 point, pushing up the yield to 4.17% at 1:46 p.m. on Feb. 5. A basis point is 0.01 percentage point.

Retailers' January sales rose 5.8%, according to the International Council of Shopping Centers. January is typically a clearance month for retailers as they empty shelves of leftover holiday merchandise to prepare to stock spring shirts and dresses.

Wal-Mart, the world's biggest retailer, had a more-than-forecast 5.7% gain from the year-earlier period. Limited, owner of the Victoria's Secret chain, said same-store sales surged 23%.

Economists had expected productivity to rise at a 2.5% annual pace last quarter, based on the median of 55 forecasts in a Bloomberg News survey. The third-quarter gain was revised from a previously reported 9.4% pace. Today's report reflected the Commerce Department's benchmark revision to economic growth reported in December.

Labor costs dropped 1.2% last year after falling 2.5% in 2002. Hours worked rose a 1.5% pace, the biggest since the first quarter of 2000, compared with a 0.8% rise in the third quarter. Output increased at a 4.2% rate compared with a 10.4% gain in the previous three months.

Among manufacturers, productivity grew at a 4.8% pace after rising at a 9.7% rate in the third quarter. The economy grew at a 4% annual pace last quarter, helped by a 10% increase in business spending on equipment and software, according to the U.S. Commerce Department. The rise in corporate investment followed a 17.6% gain in the previous quarter that was the biggest in five years.

Growth will accelerate to a 4.4% annual pace this quarter, helping the world's largest economy expand 4.6% for the year, according to the consensus estimate of economists surveyed by Blue Chip Economic Indicators last month. It would be the strongest rate of growth since 1984.

With reporting by Joe Richter and Scott Lanman in Washington, Rachel Layne in Boston and Charles Pellett in New York.