U.S. Worker Efficiency Higher Than Estimated

The efficiency of U.S. workers rose even more strongly in the second quarter of the year than previously estimated, raising output and helping to keep a lid on inflation, the government said Wednesday.

Boosting the case for steady U.S. interest rates in the months ahead, the Labor Department said nonfarm productivity--the output per hour of workers outside the farm sector--rose at an annualized rate of 5.7% between April and June, up from an estimate of 5.3% last month.

Unit labor costs, closely monitored for signs of inflation because they are the largest part of total production costs, fell at an annual rate of 0.4% in the second quarter. This was an even steeper decline than the 0.1% dip originally estimated.

The fall in the April-June period contrasted with a sharp 1.9% increase in unit labor costs in the first quarter. From the second quarter a year ago, unit costs also eased 0.4%.

Acceleration in productivity growth has enabled the U.S. economy to grow faster with lower inflation. Combined with falling labor costs, the data have helped convince Federal Reserve policymakers to hold rates steady at meetings in June and August after six rate rises between June 1999 and May.

The second-quarter gain in productivity came in far above the 1.9% rise in the first quarter of the year.

The figures “are clearly spectacular and indicate that for now the labor market offers no threat to the inflation outlook,” said Ian Shepherdson, chief U.S. economist at High Frequency Economics in Valhalla, N.Y.

Year-over-year, second-quarter productivity rose 5.2%, up from an originally reported 5.1% gain and the largest such rise since a 5.3% gain in the third quarter of 1983, the report showed.

“The story remains this incredibly strong productivity growth and the absolute cap that that’s placed on unit labor costs,” said Tim O’Neill, chief economist at Bank of Montreal. “Even as wages have gradually crept up, productivity growth has been more than a match for it.”

The productivity numbers, which exceeded expectations by most Wall Street economists, could help steady the U.S. central bank’s hand going forward, analysts said. Fed policymakers meet Oct. 3 amid expectations they will again keep borrowing costs on hold as they await further signs of a U.S. economic slowdown.

But some analysts warned that with the economy projected to slow, productivity gains were also likely to get smaller.

“The best news is probably behind us,” said Richard Berner, chief U.S. economist at Morgan Stanley Dean Witter in New York. “With the slowing economy, you should see slowing productivity growth.”

After growing at a spectacular rate of 5.3% in the second quarter, most economists expect the economy to slow somewhat in the third quarter. Such a slowing most likely would be welcomed inside the Fed, where policymakers have long sought to steer growth rates to a more sustainable level.

Fed Chairman Alan Greenspan last month gave an upbeat assessment of the U.S. productivity miracle but also warned that the pace of productivity growth would have to slow “at some point in the future.”

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Business Productivity

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

*

2nd quarter: 5.7%

Source: Labor Department