Fall in Productivity Is First in 5 Years

The productivity of U.S. workers fell last quarter for the first time in almost five years and labor costs rose, adding to concerns that employment gains and faster wage growth will fuel inflation.

Productivity, which measures employee efficiency, declined at an annual rate of 0.5% after rising at a 4.2% pace in the previous three months, revised Labor Department data showed Tuesday. Labor costs increased 3.3%, the most in a year.

Growth in productivity has slowed as companies squeeze as much as they can from their workers and equipment. Limits on employers’ ability to meet demand are encouraging them to hire more and may lead them to offer bigger paychecks to attract and keep qualified help, economists said.

“Businesses will be adding workers, so productivity growth will stay modest in 2006,” said Michelle Girard, senior economist at RBS Greenwich Capital Markets in Greenwich, Conn. “The increase in unit labor costs is something the Federal Reserve is aware of, and it adds to the case they’re going to continue raising rates.”

Merrill Lynch & Co. economists Tuesday raised their federal funds rate forecast for this year, following a similar move by Lehman Bros. Holdings Inc. last week.

A shift in expectations has boosted the dollar and led to a slump in emerging stock markets on concern the increase in U.S. borrowing costs will slow the global economy.

Productivity may rebound this quarter as economic growth picks up.

At the same time, economists said such gains might prove short-lived.

A separate report showed that consumer borrowing increased in January by the most in four months as Americans picked up the pace of spending. Consumer credit, or non-mortgage loans to individuals, rose $3.9 billion during the month after a $3.4-billion rise in December, the Fed said.