Companies in U.S. Sustain Productivity to Cut Labor Costs

The productivity of U.S. workers held up in the third quarter as companies focused on cutting labor expenses to preserve profits as sales cool.

The measure of employee output per hour climbed at a 1.9 percent annual rate, the same as in the prior three months, a Labor Department report showed today in Washington. The median forecast in a Bloomberg survey of 60 economists called for a 1.8 percent rise. Costs per worker unexpectedly dropped at a 0.1 percent rate.

The decrease in expenses reflects concern about cooling overseas markets and the so-called fiscal cliff of tax increases and government spending cuts that may take effect next year if lawmakers fail to act. Lower labor costs mean companies can hold the line on prices, giving Federal Reserve policy makers scope to keep pumping money into the economy to spur growth.

“Companies are just very uncertain about the future,” said Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut, who projected labor costs would drop 0.2 percent. “Demand isn’t particularly strong, so companies aren’t eager to raise prices. Since you can’t raise prices, you better be careful about costs.”

Economists’ productivity estimates ranged from 0.5 percent to 3 percent.

The increase in efficiency for the second quarter was revised down from a previously reported 2.2 percent gain.

Fewer Claims

Fewer Americans than forecast filed first-time claims for unemployment insurance last week, an indication demand is strong enough to maintain current staff levels, another report from the Labor Department showed today.

Applications for jobless benefits fell 9,000 to 363,000 in the week ended Oct. 27, the fewest in three weeks. Economists forecast 370,000 claims, according to the median estimate in a Bloomberg survey. Data for New Jersey and the District of Columbia were estimated because those offices were closed due to Hurricane Sandy, a spokesman said as the figures were released.

Companies added 158,000 workers in October, a private report based on payrolls also showed today. The increase in employment was higher than forecast, according to data from Roseland, New Jersey-based ADP Research Institute. This is the first ADP report derived using a larger sample and new methodology.

Stock-index futures rose after the reports. The contract on the Standard & Poor’s 500 Index climbed 0.2 percent to 1,409.4 at 8:53 a.m. in New York. Treasury securities fell, sending the yield on the benchmark 10-year note up to 1.71 percent from 1.69 percent late yesterday.

Labor Costs

The productivity report showed labor expenses fell following a 1.7 percent advance in the prior three months.

Unit labor costs, which are adjusted for efficiency gains, were forecast to rise 0.8 percent, the survey median showed.

Adjusted for inflation, hourly earnings decreased at a 0.4 percent rate after increasing at a 2.8 percent pace, today’s report showed.

Output rose at a 3.2 percent rate, following a 2.1 percent gain the prior quarter.

Hours worked rose at a 1.3 percent pace, after a 0.2 percent increase. Compensation for each hour worked climbed at 1.8 percent annual pace.

Manufacturers are having a more difficult time sustaining efficiency. Factory productivity decreased at a 0.4 percent rate in the third quarter.

Economic Growth

Commerce Department data released last week showed gross domestic product climbed at a 2 percent annual rate from July through September after a 1.3 percent pace in the previous three months. Gains in consumer spending, defense outlays and homebuilding boosted growth.

Hiring has been restrained as concern mounts that growth is not strong enough to weather the more than $600 billion in tax increases and spending cuts slated to take effect if lawmakers fail to act by year’s end.

Payrolls rose by 125,000 in October after a 114,000 gain in September, according to the Bloomberg survey median ahead of a Labor Department report due tomorrow. The jobless rate probably advanced to 7.9 percent from 7.8 percent, economists predicted.

Cost-cutting efforts are helping some businesses like Raytheon Co. (RTN), the world’s largest missile maker, which boosted its full-year profit forecast. Waltham, Massachusetts-based Raytheon has had a net reduction of 3,000 employees so far this year due to “changes in the mix of the company’s programs,” spokesman Jon Kasle said. While about half the positions eliminated were tied to work the company lost, it continues to hire for areas of business that are growing, officials said.

Raytheon’s performance rests on its “continued focus on reducing cost and increasing productivity,” Chairman and Chief Executive Officer Bill Swanson said in an Oct. 25 statement.

Slowing business investment may also limit productivity improvements. Corporate spending on equipment and software was unchanged last quarter, the weakest reading in three years, according to the GDP report released on Oct. 26.

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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