Productivity in U.S. Probably Decreased, Labor Costs Climbed

The productivity of U.S. workers probably fell in the second quarter for the first time in a year, pushing up labor costs, economists said before a report today.

The measure of employee output per hour dropped at a 0.9 percent annual rate after a 1.8 percent gain in the prior three months, according to the median estimate of 60 economists surveyed by Bloomberg News. Expenses per employee climbed at a 2.4 percent pace, the most in a year, the report may also show.

Falling efficiency and rising costs mean companies like AutoNation Inc. (AN) have less incentive to take on staff or increase pay, representing another obstacle to the recovery after growth almost stalled in the first half of the year. Federal Reserve policy makers, meeting today, are facing mounting pressure to do more to bolster the world’s largest economy as shares plunge.

“Employers will be careful about adding jobs and hours,” said John Herrmann, senior-fixed income strategist at State Street Global Markets LLC in Boston. “Fed policy makers will have to mark down their growth forecasts and may assert their willingness to support the economy.”

The Labor Department’s report is due at 8:30 a.m. in Washington. Economists’ productivity estimates ranged from a rise of 2.2 percent to a drop of 2 percent.

Members of the Federal Open Market Committee, scheduled to release a statement at 2:15 p.m. in Washington, will debate what to do next following recent signs of a more pronounced U.S. slowdown and European debt woes that battered the stock market.

Bernanke’s View

Fed Chairman Ben S. Bernanke told Congress on July 14 that central bank officials want to see if the economy rebounds as anticipated in the coming months and are keeping a close eye on inflation.

Stocks sank yesterday, extending the biggest slump for the Standard & Poor’s 500 Index since 2008’s bear market, amid concern that a downgrade of the nation’s credit rating by S&P may worsen an economic slowdown. The S&P 500 Index (SPX) plunged 6.7 percent to close at 1,119.46 in New York.

Gross domestic product expanded at a 1.3 percent annual pace from April through June, after a 0.4 percent rate in the previous three months, the Commerce Department said on July 29. Household spending rose at 0.1 percent pace, the weakest since the same period in 2009.

Revisions to GDP figures going back to 2003 showed the 2007-2009 recession took a bigger bite out of the economy than previously estimated, and the recovery lost speed throughout 2010. Today’s productivity report will incorporate those output updates, which will probably also reduce efficiency.

Burst of Productivity

Employee output per hour grew 3.8 percent yearly on average in the past two years, the biggest back-to-back gain since 2002- 2003. Unit labor costs, which are adjusted for efficiency, declined 1.6 percent as businesses cut workers and squeezed more efficiency from existing staff.

A lack of productivity gains, combined with stagnant growth, may keep a lid on hiring and wages, hurting Americans’ living standards. Employment grew by 117,000 in July and the jobless rate fell to 9.1 percent, the Labor Department reported last week.

Some companies are stepping up efforts to reduce expenses. Cisco Systems Inc. (CSCO), the largest networking-equipment maker, plans to eliminate about 6,500 jobs, or 9 percent of its full- time global workforce, to trim $1 billion in annual costs and boost profit growth.

Mike Jackson, chief executive officer of AutoNation, the largest U.S. auto dealer, last week said his workers are unlikely to see bigger paychecks any time soon. With new-car demand still at a “depression level,” the Fort Lauderdale, Florida-based company has to stay prepared in case things “get ugly again,” he said.

“We have a fragile recovery that’s under way, which means if you introduce anything into it that’s disruptive, it’s going to knock it off its pace,” Jackson said in an Aug. 3 interview.

              Bloomberg Survey
===========================================
                             Prod-    Labor
                          uctivity    Costs
                              QOQ%     QOQ%
===========================================

Date of Release             08/09    08/09
Observation Period           2Q P     2Q P
-------------------------------------------
Median                       -0.9%     2.4%
Average                      -0.7%     2.3%
High Forecast                 2.2%     4.2%
Low Forecast                 -2.0%    -0.5%
Number of Participants          60       55
Previous                      1.8%     0.7%
-------------------------------------------
4CAST                        -0.7%     3.4%
ABN Amro                     -1.5%     ---
Action Economics             -1.0%     2.5%
Aletti Gestielle             -1.0%     ---
Ameriprise Financial         -0.8%     2.7%
Barclays Capital             -0.2%     3.0%
BBVA                         -0.1%     1.0%
BMO Capital Markets          -0.7%     1.7%
BNP Paribas                  -1.5%     1.0%
BofA Merrill Lynch           -1.5%     3.2%
Briefing.com                 -0.6%     2.0%
Capital Economics            -0.8%     2.5%
CIBC World Markets           -0.7%     ---
Citi                         -1.2%     1.7%
ClearView Economics          -1.5%     3.5%
Credit Agricole CIB          -0.4%     2.1%
Credit Suisse                -0.2%     2.7%
Daiwa Securities America      0.0%     ---
DekaBank                     -0.8%     2.3%
Desjardins Group             -0.9%     2.3%
Deutsche Bank Securities     -1.0%     2.5%
DZ Bank                      -1.0%     1.5%
Fact & Opinion Economics     -1.2%     2.5%
First Trust Advisors         -0.5%     0.9%
FTN Financial                -0.8%     2.4%
Goldman, Sachs & Co.         -1.5%     3.0%
Helaba                        0.0%     2.0%
HSBC Markets                 -0.5%     2.0%
IDEAglobal                    2.2%    -0.5%
Informa Global Markets       -1.7%     4.2%
ING Financial Markets        -0.9%     2.6%
Insight Economics            -0.8%     2.5%
J.P. Morgan Chase            -1.1%     2.3%
Jefferies & Co.              -1.0%     2.5%
Landesbank BW                -2.0%     3.7%
Manulife Asset Management    -1.0%     2.2%
MF Global                    -0.8%     1.8%
Moody’s Analytics             0.1%     1.7%
Morgan Stanley & Co.         -1.2%     2.5%
Natixis                       0.2%     1.5%
Newedge                      -1.0%     2.5%
Nomura Securities             0.0%     2.3%
Nord/LB                       0.0%     1.5%
Parthenon Group              -0.6%     2.3%
Pierpont Securities          -0.8%     3.8%
PineBridge Investments       -1.2%     ---
PNC Bank                     -1.0%     3.0%
Raiffeisenbank International -1.0%     2.3%
Raymond James                -1.6%     4.2%
RBS Securities               -1.0%     3.0%
SMBC Nikko Securities        -1.0%     3.0%
Societe Generale             -0.2%     1.6%
Standard Chartered            ---      ---
State Street Global Markets  -0.9%     2.8%
Stone & McCarthy Research    -1.0%     2.8%
TD Securities                -1.0%     2.5%
UBS                          -0.9%     2.0%
University of Maryland        0.8%     1.8%
Wells Fargo & Co.             0.3%     1.5%
WestLB AG                    -0.8%     2.5%
Westpac Banking Co.           ---      ---
Wrightson ICAP                0.0%     2.2%
===========================================

To contact the reporter on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

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