Productivity Eases 0.1% in Second Quarter

Workplace productivity slipped 0.1% in the April-June quarter, but it had little immediate effect on inflation, the government said Wednesday.

Although the dip in efficiency did boost labor costs, economist Gordon Richards of the National Assn. of Manufacturers said businesses apparently absorbed the increases.

“For this reason, inflation should not rise and productivity should pick up again in the third quarter, as hours increase more slowly,” he said.

Indeed, economist Marilyn Schaja of Donaldson, Lufkin & Jenrette Securities Corp. said recent data already point to increased productivity and slower labor cost growth in the current quarter.

The financial markets paid little attention to the report. The Dow Jones industrial average closed up 19.60 points to 5,666.88 but failed to recover its losses a day earlier. Bond prices were unchanged. Both stocks and bonds had dropped sharply Tuesday on news that consumer prices and retail sales rose more than expected in July.

Investors fear that signs of a robust economy could cause the Federal Reserve Board to raise short-term interest rates to head off higher inflation.

The Labor Department report showed that nonfarm productivity eased because job growth boosted the number of hours worked. Productivity measures output per hours worked.

Output rose 4.2% from April through June, much faster than the 2.7% gain from January through March.

But hours worked also surged, up 4.3%, more than four times the 1% advance during the previous three months.

That resulted in a 3.8% jump in unit labor costs, more than twice the 1.5% increase in the first quarter. Unit labor costs are typically two-thirds of what consumers pay for a product.

Productivity is a key to Americans’ standard of living since greater efficiency means businesses can increase wages without raising prices as workers are producing more in the same amount of time.

Based partly on second-quarter employment reports, many analysts had expected a larger 0.5% decline in productivity. It had increased 1.8% in the first three months after falling 1.1% three months earlier.

In a separate report, the Commerce Department said business inventories increased a tiny 0.1% in June--a sign, analysts said, that companies were keeping their stockpiles lean and avoiding the large buildup that occurred in 1995.

The slight increase also occurred as sales slipped 0.5%, the first decline in five months.

The Labor Department said a measurement of inflation in its productivity report rose just 2.2% despite the dip in efficiency. Worker compensation actually fell 0.1%, when adjusted for inflation, after remaining unchanged during the first quarter.

The figures are adjusted for seasonal variations.

Some analysts fear that the current tight labor market could lead to increased wages that, without sufficient gains in productivity, would be passed on to consumers as higher prices.

Fed policymakers will study the productivity report and other recent data next Tuesday when they consider whether to raise short-term interest rates. Most analysts expect them to hold rates steady for now.