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Productivity in U.S. Declines for Second Straight Quarter

The back-to-back decrease in productivity was the first since the third and fourth quarters of 2008. Photographer: Andrew Harrer/Bloomberg
The back-to-back decrease in productivity was the first since the third and fourth quarters of 2008. Photographer: Andrew Harrer/Bloomberg

Aug. 9 (Bloomberg) -- The productivity of U.S. workers dropped from April through June for the second consecutive quarter, leading to an increase in labor costs that may restrain gains in profits.

The measure of employee output per hour fell at a 0.3 percent annual rate in the second quarter after a revised 0.6 percent drop in the prior three months, figures from the Labor Department showed today in Washington. The median estimate of 60 economists surveyed by Bloomberg News projected a 0.9 percent decrease. Expenses per employee climbed at a 2.2 percent rate.

Falling efficiency and rising costs mean companies like AutoNation Inc. have less incentive to take on staff or increase pay, representing another obstacle to the recovery after growth almost stalled in the first half of the year. To help shore up the economy, Federal Reserve policy makers today pledged for the first time to keep their benchmark interest rate at a record low at least through mid-2013.

With higher labor costs, “profitability will come under pressure,” said Eric Green, chief market economist at TD Securities Inc. in New York, who had forecast a decline in productivity. “This would create more caution in expanding payrolls, especially at a time when there is so much uncertainty.”

Fed Decision

The Fed’s Open Market Committee discussed a range of policy tools to bolster the economy and said it is “prepared to employ these tools as appropriate,” it said in a statement in Washington. Three members of the FOMC dissented, preferring to maintain the pledge to keep rates low for an “extended period.”

Stocks climbed, with the Standard & Poor’s 500 Index rising 4.7 percent to 1,172.53 at the 4 p.m. close in New York. Treasury securities rose, sending the yield on the benchmark 10-year note down to 2.27 percent from 2.32 percent late yesterday.

Economists’ productivity forecasts in the Bloomberg survey ranged from a decrease of 2 percent to a 2.2 percent gain. Efficiency in the first quarter was previously reported as having increased at a 1.8 percent rate.

The back-to-back drop in productivity was the first since the third and fourth quarters of 2008.

Unit labor costs, which are adjusted for efficiency gains, were projected to rise 2.4 percent, according to the survey median. Labor expenses in the first quarter were revised to 4.8 percent, the biggest gain since the fourth quarter of 2008, from a previously reported 0.7 percent advance.

Last Year

From the second quarter of 2010, productivity climbed 0.8 percent compared with a 1.2 percent year-over-year increase in the first quarter. Labor costs rose 1.3 percent from the year-earlier period following a 1.1 percent increase in the 12 months ended in the first quarter.

Today’s productivity report incorporated revisions to prior years. Worker efficiency was revised to 4.1 percent in 2010 from a previously reported 3.9 percent. For 2009, it was revised down to 2.3 percent from 3.7 percent.

Labor costs fell 2 percent in 2010, the biggest decline since records began in 1948.

Gross domestic product expanded at a 1.3 percent annual pace from April through June, after a 0.4 percent rate in the previous three months, the Commerce Department said on July 29. Household spending rose at 0.1 percent pace, the weakest since the same period in 2009.

GDP Revisions

Revisions to GDP figures going back to 2003 showed the 2007-2009 recession took a bigger bite out of the economy than previously estimated, and the recovery lost speed throughout 2010. Those revisions led to today’s updates in productivity.

The Fed today offered a dimmer view of the economy than it did in the last statement in late June.

“Economic growth so far this year has been considerably slower than the committee had expected,” it said. The Fed also said it expects a “somewhat slower pace of recovery over coming quarters,” adding that “downside risks to the economic outlook have increased.”

A lack of productivity gains, combined with stagnant growth, may keep a lid on hiring and wages, hurting Americans’ living standards. Employment grew by 117,000 in July and the jobless rate fell to 9.1 percent, the Labor Department reported last week.

Some companies are stepping up efforts to reduce expenses. Cisco Systems Inc., the largest networking-equipment maker, plans to eliminate about 6,500 jobs, or 9 percent of its full-time global workforce, to trim $1 billion in annual costs and boost profit growth.

Mike Jackson, chief executive officer of AutoNation, the largest U.S. auto dealer, last week said his workers are unlikely to see bigger paychecks any time soon. With new-car demand still at a “depression level,” the Fort Lauderdale, Florida-based company has to stay prepared in case things “get ugly again,” he said.

“We have a fragile recovery that’s under way, which means if you introduce anything into it that’s disruptive, it’s going to knock it off its pace,” Jackson said in an Aug. 3 interview.

To contact the reporter on this story: Shobhana Chandra in Washington at

To contact the editor responsible for this story: Christopher Wellisz at

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