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U.S. Productivity Slowed in First Quarter, Labor Costs Rose

The productivity of U.S. workers slowed in the first quarter and labor costs rose as companies boosted employment to meet rising demand.

The measure of employee output per hour increased at a 1.8 percent annual rate after a 2.9 percent gain in the prior three months, revised figures from the Labor Department showed today in Washington. Employee expenses climbed at a 0.7 percent rate after dropping 2.8 percent the prior quarter.

Rising costs of inputs such as energy and components means companies may look to contain labor costs, a sign hiring may not accelerate. A report tomorrow is projected to show employers hired 170,000 workers in May, down from 244,000 the prior month, according to economists’ estimates.

“Productivity growth has slowed in the past year but from very strong rates and it remains fairly decent,” Sal Guatieri, a senior economist at BMO Capital Markets in Toronto, said before the report. “Labor costs have moved higher because of the slowing in productivity growth, but they were generally falling for some time and remain very weak, essentially implying no threat to the inflation outlook.”

Economists projected productivity would rise at a 1.7 percent pace, according to the median of 62 forecasts in a Bloomberg News survey. Estimates ranged from increases of 1.5 percent to 2 percent.

Unit labor costs, adjusted for efficiency gains, were projected to rise 0.8 percent, according to the survey median.

Jobless Claims

Another report from the Labor Department today showed more Americans than forecast filled applications for unemployment benefits last week, signaling the labor market is struggling to pick up. Jobless claims fell by 6,000 to 422,000 in the week ended May 28, Labor Department figures showed today in Washington. Economists surveyed by Bloomberg projected a drop in claims to 417,000, according to the median forecast.

Tomorrow’s payrolls report may also show unemployment fell to 8.9 percent in May from 9 percent the prior month, according to economists surveyed.

Today’s report showed productivity climbed 1.3 percent compared with the first quarter of 2010, the smallest 12-month gain in two years. Labor costs rose 0.7 percent from the year-earlier quarter, the biggest year-to-year increase since the last three months of 2008.

Today’s productivity report showed output rose at a 3.2 percent rate. The increase was led by a 7.7 percent surge among manufacturers.

More Hours

Hours worked climbed at a 1.4 percent pace after a 1.5 percent gain in the prior quarter. Compensation for each hour worked increased at a 2.5 percent annual pace.

Adjusted for inflation, compensation dropped at a 2.6 percent pace last quarter, matching the prior quarter’s drop.

Among manufacturers, productivity increased at a 4.2 percent pace, pushing labor costs down by 1.4 percent.

Companies are trying to reduce labor expenses to counter rising commodity expenses. A barrel of crude oil rose to an intraday high of $114.83 on May 2, the highest level since September 2008, and has since receded to around $100 on the New York Mercantile Exchange.

Productivity gains are also helping companies such as Benton Harbor, Michigan-based Whirlpool Corp. deal with higher raw-material costs.

“We do expect to fully offset these increases by continued strong and improving productivity throughout the year,” Jeff Fettig, chairman and chief executive officer, said in an April conference call.

Efficiency Limits

The number of hours worked increased in the first three months of the year from the previous quarter even as the pace of economic growth slowed, showing employers found it difficult to meet demand without more hiring.

The economy expanded at a 1.8 percent annual pace from January through March, after a 3.1 percent advance in the last three months of 2010, the Commerce Department reported on May 26.

Some companies are already making plans to expand payrolls further in 2012. General Motors Co. said last week it will invest $69 million and add 2,500 jobs to start making new models at the Detroit plant that builds the Chevrolet Volt plug-in hybrid.

Two shifts will be added at the Detroit-Hamtramck factory to produce the Chevrolet Impala and Malibu sedans next year, Detroit-based GM said in a statement. The investments are part of plans GM announced earlier this month to spend $2 billion and add or preserve 4,000 jobs at eight U.S. plants.

While today’s productivity report may show labor costs are rising, wage pressures are likely to remain contained.

“In general, increases in wages have been subdued,” Federal Reserve policy makers said in minutes of their April policy meeting released May 18. “Some participants noted that pressures on labor costs continued to be muted. Participants generally anticipated that the higher level of overall inflation would be transitory.”

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