U.S. Economy: Productivity Fell in Second Quarter

Worker productivity in U.S. unexpectedly declined
An employee sands the frame of a flatbed Kawasaki subway car at the Kawasaki Rail Car Inc. plant in Yonkers, New York. Photographer: Andrew Harrer/Bloomberg

Productivity in the U.S. unexpectedly decreased in the second quarter after employers expanded the workweek by the most in four years even as the world’s largest economy cooled.

The measure of employee output per hour fell at a 0.9 percent annual rate, the first drop since late 2008, the Labor Department said today in Washington. Hours worked climbed at a 3.6 percent rate, leading to a 2.6 percent increase in the amount of goods and services produced.

A lengthening workweek signals employers have reached efficiency limits after productivity climbed by the most in five decades in the 12 months to March. Federal Reserve policy makers today announced additional steps to bolster growth.

Productivity “is coming back to Earth after what had been unsustainably strong gains,” said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York, who projected it would drop. Hours worked “seems to be the margin along which firms are expanding.”

The Fed’s Open Market Committee said in a statement that “the pace of economic recovery is likely to be more modest in the near term than had been anticipated.” The Fed retained a commitment to keep its benchmark interest rate close to zero for an “extended period.”

Reinvest Holdings

The central bank will also reinvest holdings of agency debt and mortgage-backed securities, the first attempt by the Fed since March 2009 to keep an economy that’s been slowing from relapsing into recession.

Stocks pared losses after the announcement. The Standard & Poor’s 500 Index fell 0.6 percent to 1,121.06 at the 4 p.m. close in New York. Treasury securities rallied, pushing down the yield on the 10-year not to 2.77 percent from 2.83 percent late yesterday.

Another report today showed inventories at wholesalers rose 0.1 percent in June, less than forecast, as companies kept stockpiles in line with slowing demand. Sales at distributors dropped 0.7 percent, the most since March 2009, the Commerce Department said.

The median forecast of 64 economists surveyed by Bloomberg News called for a 0.1 percent gain in productivity. Estimates ranged from a drop of 1.2 percent to a 1.9 percent increase.

First-Quarter Revision

The Labor Department revised the first-quarter gain in efficiency to a 3.9 percent pace from 2.8 percent. The data updates went back to 2007, reflecting the annual revisions to gross domestic product issued by the Commerce Department last month.

Labor costs after adjusting for the drop in efficiency rose at a 0.2 percent pace, less than estimated and the first increase in a year, today’s report showed.

The increase in expenses followed a 3.7 percent drop in the first three months of the year that was larger than previously estimated. Economists projected costs would rise at a 1.5 percent pace, according to the survey median.

The report stirred debate about the outlook for employment and the workweek.

The figures indicate companies will redouble efforts to contain costs as the recovery unfolds, said Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc., a New York forecasting firm.

More Obstacles

“Slower growth in output will prompt companies to continue to focus on aggressive approaches to cost cutting,” Shapiro said in a note to clients. “This will heighten obstacles to a convincing labor-market recovery.”

For Joel Naroff, the data show additional gains in employment may be on the way.

“This could be a turning point,” Naroff, president of Naroff Economic Advisors in Holland, Pennsylvania, said in a note to clients. “If working people longer and harder is no longer bringing larger returns to businesses, executives may have to find other ways to expand production. They might actually have to hire more workers.”

Fed Chairman Ben S. Bernanke last month said the outlook for growth was “unusually uncertain,” and signaled that signs of deeper economic weakness would be needed to justify more stimulus. On Aug. 2 Bernanke said rising wages will probably spur household spending in the next few quarters.

Productivity increased 3.9 percent in the year ended June. It had increased 6.3 percent in the first quarter compared with a year earlier, the biggest 12-month gain since 1962.

Factory Productivity

Among manufacturers, productivity increased at a 4.5 percent pace as output climbed faster than hours worked. Labor costs at factories dropped at a 6.1 percent pace from the previous three months.

Economic growth has slowed since the first quarter, with the economy expanding at a 2.4 percent annual rate from April through June following gains of 3.7 percent the first three months of the year and 5 percent at the end of 2009.

Delta Air Lines Inc. is among companies looking to take on more staff. The world’s largest carrier plans to hire 1,000 workers at its 25 biggest U.S. airports to help with planes that are flying with near-record percentages of seats filled and cope with weather disruptions, Chief Executive Officer Richard Anderson said last month.

A Labor Department last week showed private companies added 71,000 jobs in July, fewer than the median forecast of economists surveyed.

General Dynamics Corp. is among companies still looking to cut expenses by streamlining work. The maker of Abrams tanks and Gulfstream business jets on July 28 posted second-quarter profit that rose 4.9 percent and raised its full-year earnings forecast.

“We continue to increase efficiency, improve productivity and drive cost out of our processes,” Chief Executive Officer Jay Johnson said in a statement.

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