Productivity disappoints
U.S. worker productivity grew at a slower pace than initially estimated in the first quarter, driving up labor costs and reinforcing concerns about inflation.
The Labor Department reported Wednesday that nonfarm productivity, a measure of how much workers produce per hour, advanced at a 1% annualized pace in the quarter, pushing up unit labor costs 1.8%.
Economists had expected the report to show weaker productivity and higher labor costs after the government reported that gross domestic product grew at just a 0.6% annual rate during the first quarter.
“It indicates growth was not so great in the first quarter and that went straight into productivity,” said Nigel Gault, chief U.S. economist at Global Insight in Waltham, Mass.
“As far as the Fed is concerned, they are not going to be surprised, but this reminds them that wage pressure is still the No. 1 inflation risk, at least domestically,” he said.
Economists believe that the first quarter marked a low point for the U.S. economy, and they now expect economic growth to quicken, which means productivity growth should pick up as well.
The first-quarter productivity figure, revised from the government’s 1.7% estimate a month ago, was followed by the Bush administration’s downgraded assessment of the economy for this year.
In a forecast, the White House Council of Economic Advisors, the Treasury Department and the Office of Management and Budget reduced a forecast for 2007 GDP growth to 2.3% from 2.9%.
But administration officials expect growth to expand later this year. “A variety of indicators signal a faster-growing U.S. economy for the rest of this year,” said Edward Lazear, chairman of the White House’s Council of Economic Advisors. “Unemployment remains remarkably low, business inventories are lean compared with sales and now industrial production is on the rise.”
On the labor front, U.S. employers announced plans in May to eliminate 71,115 jobs, up 32% from May 2006, when job cuts totaled 53,716.
It was the second consecutive month in which job cuts increased from the year before, according to the monthly report released Wednesday by global outplacement consultant Challenger, Gray & Christmas Inc.
Still, year to date, the pace of job cutting remains below last year’s level, but the gap is rapidly closing.
Downsizing in the computer industry dominated May’s reductions. “Heavy job cutting in the computer industry reflects a slowdown in business spending on new technology. We may continue to see heavy cuts in the months ahead with spending expected to remain soft in the near future,” Chief Executive John A. Challenger said.
A separate report showed rising mortgage rates held back demand for home loans last week, with an increase in applications for loans to purchase overshadowed by a drop in refinancings.
The Mortgage Bankers Assn.’s mortgage application index slipped 1.7% to a seasonally adjusted 625.3 in the week ended Friday as long-term interest rates hit their highest level since October.
