Productivity Down, Labor Costs Soar 8.1%

U.S. business productivity declined at a 2.5% annual rate in the first quarter of 1985, the biggest drop in more than three years, the Labor Department reported today.

The report also showed that unit labor costs soared at an 8.1% annual rate, the largest increase since the fourth quarter of 1981, said the department’s Bureau of Labor Statistics.

The decline in productivity, meanwhile, was the biggest since a 4.4% drop that also came in the fourth quarter of 1981.

Today’s figures reflect a general slowing down in the economy, but also some obsolescence in industrial plants and equipment, said analyst Michael Evans, who runs his own economic forecasting firm in Washington. Investment in new technology has been strong in computers and the auto industry, while lagging in some other areas.

Poor productivity suggests lower profits or higher inflation and “what we have seen in the first quarter so far is that profits took a real hit,” Evans said.

Many companies were unable to pass along cost increases in the face of weak demand. Evans suggested that companies will start passing along many of the cost increases, reflecting the Federal Reserve Board’s goal of prolonging the recovery by cutting their interest charges on loans to banks.