Productivity rises as wages moderate

Worker productivity increased at a faster pace in the first three months of the year than previously estimated, wage pressures moderated and an important measure of business activity showed the service sector skirted recession in May.

The Labor Department reported Wednesday that productivity rose at an annual rate of 2.6% from January through March. That was faster than the government’s first estimate of 2.2% a month earlier.

Wage pressures eased from the final three months of last year. Labor costs rose at an annual rate of 2.2% in the first quarter, compared with a 4.7% surge late in 2007.

The Institute for Supply Management said its non-manufacturing index, which covers 80% of the economy, stood at 51.7 in May -- better than expected and close to April’s 52 figure.

A reading above 50 indicates that service companies, where most people in the U.S. work, are expanding activity despite the effect of a prolonged slump in housing, a severe credit crunch, soaring energy costs and plunging consumer confidence.

“The economy may be huffing and puffing and gasping for air, but it has yet to collapse,” said Joel Naroff, chief economist at Naroff Economic Advisors.

Naroff said the performance for service industries was encouraging when combined with the report Monday that the institute’s manufacturing index rose slightly in May.

“The economy is not spiraling downward, and that is critical” for the Federal Reserve, he said.