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Productivity in U.S. Cools as Labor Costs Jump

Photographer: Sam Hodgson/Bloomberg

A contractor at a construction site in San Diego on Feb. 28, 2012. Close

A contractor at a construction site in San Diego on Feb. 28, 2012.

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Photographer: Sam Hodgson/Bloomberg

A contractor at a construction site in San Diego on Feb. 28, 2012.

The productivity of U.S. workers rose at a slower pace in the fourth quarter and labor costs jumped, indicating businesses are reaching the limit of wringing efficiency from their workforce.

The measure of employee output per hour climbed at a 0.9 percent annual rate, after a 1.8 percent gain in the prior three months, revised figures from the Labor Department showed today in Washington. Expenses per worker climbed at a 2.8 percent rate, more than twice as much as previously estimated.

Productivity will probably remain restrained as businesses gain confidence in the economic expansion and take on more workers to meet growing demand. Nonetheless, rising labor costs and slowing efficiency may put pressure on corporate profits.

Less productivity means “the only way to increase output is to hire more people,” said Brian Jones, a senior U.S. economist at Societe Generale in New York, who was the only analyst in a Bloomberg News survey to accurately forecast the jump in labor costs. “It’s a positive for the labor market,” he said, at the same time “margins should be getting squeezed a bit.”

Another report today showed companies added 216,000 workers to their payrolls in February, according to data from Roseland, New Jersey-based ADP Employer Services.

Stock-index futures held earlier gains after the reports. The contract on the Standard & Poor’s 500 Index maturing this month rose 0.5 percent to 1,349 at 8:46 a.m. in New York.

Prior Estimates

Fourth-quarter productivity was revised up from an initial estimate of 0.7 percent issued last month. Labor costs were revised up from a prior estimate of 1.2 percent.

For all of 2011, productivity climbed 0.4 percent, the smallest gain since 1995. The increased was revised down from an initial estimate of 0.7 percent.

Labor expenses last year increased 2 percent, revised from a 1.2 percent gain and the most since 2008.

Fourth-quarter productivity was projected to rise 0.8 percent, according to the median forecast of 65 economists surveyed by Bloomberg News. Estimates ranged from gains of 0.5 percent to 1.6 percent.

Unit labor costs, which are adjusted for efficiency gains, were forecast to rise 1.2 percent in the fourth quarter, the survey median showed.

The revised jump in labor expenses last quarter reflected the biggest six-month increase in worker pay in almost five years. Wages and salaries in the third and fourth quarters of 2011 grew a combined $197.3 billion, the most since the six months ended March 2007, Commerce Department data revisions showed on Feb. 29. Gross domestic product climbed at a revised 3 percent annual rate, faster than previously estimated and the most since the second quarter of 2010.

Productivity Focus

Companies taking steps to boost efficiency and cushion rising employee expenses include United Parcel Service Inc. (UPS), the world’s largest package-delivery company. UPS reported a jump in fourth-quarter earnings and forecast a 2012 profit that exceeded analysts’ estimates, helped by higher demand for shipping.

“In the fourth quarter, our productivity improvements offset the entire wage-rate increase,” Scott Davis, chairman and chief executive officer, said on a Jan. 31 conference call.

Improving demand is boosting hiring. A report in two days may show payrolls rose by 210,000 in February, according to the median forecast of economists surveyed by Bloomberg.

The projected increase in payrolls for last month would follow gains of 243,000 in January and 203,000 in December. It would mark the strongest three-month stretch in almost a year. The jobless rate in February probably held at an almost three- year low of 8.3 percent, economists predicted.

“On balance, the data indicate improving growth and prospects for job creation in 2012,” Federal Reserve Bank of Dallas President Richard Fisher said in a speech on March 5. “However, the outlook is hardly robust.”

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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