Worker Productivity in U.S. Declines, Pushing Up Labor Costs

Photographer: David Paul Morris/Bloomberg

An employee works in a conference room in an office in San Francisco. Companies ramped up hiring toward the end of 2012, a sign they’re finding it difficult to make do with the existing staff as sales improve. Close

An employee works in a conference room in an office in San Francisco. Companies ramped... Read More

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Photographer: David Paul Morris/Bloomberg

An employee works in a conference room in an office in San Francisco. Companies ramped up hiring toward the end of 2012, a sign they’re finding it difficult to make do with the existing staff as sales improve.

The productivity of U.S. workers fell more than projected in the fourth quarter as the economy shrank, pushing labor expenses up and showing companies are approaching the limit of how much efficiency they can wring from employees.

The measure of employee output per hour decreased at a 2 percent annual rate, the worst performance in almost two years, after a 3.2 percent gain in the prior three months, a Labor Department report showed today in Washington. The median forecast in a Bloomberg survey of 63 economists called for a 1.4 percent drop. Expenses per worker increased at a 4.5 percent rate, more than estimated.

Companies ramped up hiring toward the end of 2012, a sign they’re finding it difficult to make do with the existing staff as sales improve. A pickup in consumer and business spending last quarter -- even as the economy shrank due to a plunge in defense outlays and slower stockpiling -- also will help to improve the job market this year.

“Companies have been getting as much as they can out of the existing workforce, and they’re strapped now,” said Ryan Sweet, a senior economist at Moody’s Analytics Inc. in West Chester, Pennsylvania. “They recognize that they can’t grow their business without adding to their workforce.”

Economists’ estimates in the Bloomberg survey ranged from a decline of 3.5 percent to a gain of 0.3 percent. Productivity in the third quarter was revised up from a previously reported 2.9 percent gain.

First-time claims for unemployment insurance payments fell last week, returning to levels seen in the second half of 2012, another report from the Labor Department showed today.

Jobless Claims

Applications for jobless benefits dropped 5,000 to 366,000 in the week ended Feb. 2. Economists forecast 360,000 claims, according to the median of 53 estimates in a Bloomberg survey.

Stock-index futures rose after the reports. The contract on the Standard & Poor’s 500 Index maturing in March climbed 0.1 percent to 1,508.3 at 8:46 a.m. in New York.

For all of 2012, productivity climbed 1 percent after a 0.7 percent gain the prior year. The advance was less than half the 2.3 percent average from 2000 through 2011.

The increase in fourth-quarter labor expenses followed a 2.3 percent drop in the prior three months. Unit labor costs, which are adjusted for efficiency gains, were forecast to rise 3 percent, according to the Bloomberg survey median.

Annual Advance

For all of 2012, labor costs increased 0.7 percent following a 2 percent gain a year earlier. They climbed an average of 1 percent from 2000 through 2011.

Output rose at a 0.1 percent rate in the fourth quarter after jumping 4.7 percent the prior quarter.

Hours worked climbed at a 2.2 percent pace after a 1.5 percent gain.

Manufacturers fared better than other businesses last quarter as they eked out a gain in efficiency. Productivity increased at a 0.5 percent rate after it fell 0.9 percent from July through September.

The drop in total U.S. productivity was largely a result of special or one-time events that led to a contraction in the economy last quarter, and a jump in labor costs, economists said. Gross domestic product fell at a 0.1 percent annual rate from October to December, after rising at a 3.1 percent pace in the third quarter, according to Commerce Department data last week.

Consumer spending and business investment accelerated, the GDP report also showed, even as defense outlays posted the biggest drop in 40 years and stockpiles were built at a slower pace, in part reflecting the damage from superstorm Sandy.

Fed’s View

“Growth in economic activity paused in recent months, in large part because of weather-related disruptions and other transitory factors,” Federal Reserve policy makers said in a Jan. 30 statement after meeting in Washington. They expect “economic growth will proceed at a moderate pace and the unemployment rate will gradually decline.”

Hiring accelerated in the fourth quarter, when job gains averaged 201,000 a month compared with 152,000 from July through September, according to Labor Department data on Feb. 1. The report also showed payrolls rose by 157,000 workers in January and the unemployment rate climbed to 7.9 percent.

Home Depot Inc., the largest U.S. home-improvement retailer, is among businesses taking on more employees to meet higher demand. The Atlanta-based company plans to add more than 80,000 temporary workers ahead of its busiest season, about 14 percent more than a year ago, as a housing rebound spurs spending on remodeling and landscaping. Rival Lowe’e Cos. is boosting seasonal hiring by 13 percent.

More Productive

Some are continuing efforts to be efficient. Minerals Technologies Inc., a New York-based supplier of raw materials for plastics, paper and pharmaceuticals, said productivity climbed by 6 percent last year as employees offered 9,800 suggestions at company events designed to eliminate waste, control expenses or improve quality. Workers generated 3,700 more ideas than in 2011, of which about 65 percent were implemented.

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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