Productivity Dips for First Time in 3 Years

The productivity of American workers--the crucial factor in whether living standards improve--declined for the first time in three years in the second quarter, the government said Tuesday.

Economists said the drop was probably an anomaly. Output growth slowed markedly as businesses sought to reduce stock of unsold goods. But with labor scarce, employers were reluctant to let workers go.

Productivity--output per hour of work--for nonfarm, nonsupervisory workers fell at a 0.2% annual rate from the previous quarter, the Labor Department said Tuesday. The last decline came during the first three months of 1995.

But it rose at a very brisk 3.5% rate in the first quarter of this year. So, even with the second-quarter decline, productivity was up 2% from a year earlier.

“When you cut back production in the short run, you don’t fire everybody. So productivity goes down,” said economist William Cheney of John Hancock in Boston. “But I think this can be viewed as a totally temporary phenomenon.”

Once inventories decline, businesses will start producing more goods. Output also was depressed by the now-settled General Motors strikes and, more fundamentally, by the burgeoning trade deficit with Asia.

Even with Asian spillover problems, U.S. productivity should look better in the third and fourth quarters than it did in the second, economists said.

Economist Gordon Richards of the National Assn. of Manufacturers said he expects productivity to grow 1.6% to 1.8% a year over the next five years.

That compares with 1.4% in 1997 and 2.4% in 1996, when productivity looked considerably better than the 1% average from 1974 through 1995, but not nearly as good as the 2.9% average in the 1960s and early 1970s.

Healthy productivity growth is important because it keeps inflation low and helps the stock market. That’s because employers can increase workers’ compensation and earn increased profits without raising product prices.

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Business Productivity

Percentage change from previous quarter at annual rate, seasonally adjusted:

2nd-quarter 1998: --0.2%

Source: Labor Department