U.S. Economy: Productivity Has Slowest Gain in 2 Yrs

Nov. 4 (Bloomberg) -- The productivity of U.S. workers rose at the slowest pace in almost two years in the third quarter, signaling that companies may begin adding workers at a faster rate to meet demand. Jobless claims fell.

``From a job growth point of view, the drop in productivity is good news,'' said Tim McGee, chief economist at U.S. Trust Corp. in New York. ``Businesses are to the point that, if they want to keep up with demand, they have to hire.''

Productivity, a measure of how much an employee produces for every hour of work, grew at a 1.9 percent annual rate, down from 3.9 percent in the previous three months, the Labor Department said in Washington. Initial jobless claims fell by 19,000 to 332,000 last week, the department said.

Companies are having trouble squeezing more efficiency from employees after improved technology and job cuts led to the biggest back-to-back productivity gains ever in 2002 and 2003. Labor costs rose at a 1.6 percent annual rate, the fastest since 2003's first quarter.

A report tomorrow may show U.S. employers added 175,000 jobs to payrolls, the most in five months, according to the median estimate of 77 economists surveyed by Bloomberg News. The unemployment rate may hold at a three-year low of 5.4 percent.

Productivity ``is still high and inflation pressures coming from the labor side remain benign,'' said Stephen Stanley, chief economist at RBS Greenwich Capital Inc. in Greenwich, Connecticut. ``We need to see substantially faster job growth to absorb the existing pool of excess labor supply.''

Forecast

Economists forecast third-quarter productivity would grow at a 1.5 percent annual rate, down from the previously reported 2.5 percent rate for the second quarter, based on the median estimate of 62 economists surveyed by Bloomberg News. Unit labor costs, or the amount paid for each unit of production, were expected to rise 2.3 percent after a 1 percent gain in the second quarter.

The yield on the benchmark 10-year note held at 4.07 percent in New York. Sadakichi Robbins, who helps manage about $14 billion as head of global fixed-income at Bank Julius Baer & Co. said investors were cautious ahead of tomorrow's employment report because the number of jobs created trailed median forecasts in each of the past four months.

Exit polls showed the economy was the second-most important issue in the U.S. election, which was decided yesterday in favor of President George W. Bush over Democratic challenger John Kerry, a four-term Massachusetts senator. The economy added 1.53 million jobs so far this year and remains with a net loss of 821,000 since Bush took office in January 2001. Only moral values ranked higher in the exit polls.

Productivity

``We're pretty bullish about the economy,'' said Ron Sargent, chief executive officer at Staples Inc., the world's largest office-supplies retailer, in an interview. ``A year ago, we saw small businesses starting to hire more. Today we're seeing medium companies starting to hire more.''

Even with profits of corporations in the Standard & Poor's 500 Index forecast to rise 19 percent this year, companies including Ford Motor Co. and retailer Sears, Roebuck & Co. have fewer workers than they did in 2001. S&P 500 companies employed 21.3 million people at the end of 2003, down from 21.5 million two years earlier, according to data compiled by Bloomberg.

Productivity rose 3.1 percent in the 12 months ended in September, down from a 4.9 percent year-over-year increase in June. Labor costs were up 0.6 percent in the 12-month period, the first year-over-year gain since the first quarter of 2003 and the biggest since July through September 2001.

Fed Policy

Higher labor costs come at a time when companies are finding it difficult to pass along rising costs of raw materials to consumers. The increase may therefore translate into smaller corporate profits rather than representing a threat on inflation, Stanley said. It's something Federal Reserve policy makers will need to monitor, he said.

Job growth has been strong enough to allow the Fed to raise the benchmark overnight bank lending rate three times since June to remove excess stimulation from the economy and head off inflation. The Fed is expected to raise the rate to 2 percent from 1.75 percent next week, based on the median forecast.

``The Fed will take notice that labor costs are rising after a lengthy period of restraint, but this report is likely to further convince the Fed that a moderate pace of rate hikes is still the appropriate course,'' said Sherry Cooper, chief economist at BMO Nesbitt Burns in Toronto.

Greenspan, Lacker

Fed Chairman Alan Greenspan told Congress on Sept. 8 that productivity was the ``first and by far the most important'' contributor to lagging job growth after the 2001 recession. Productivity rose 4.4 percent the past two years, the first time since records began in 1947 productivity exceeded 4 percent in consecutive years.

Jeffrey Lacker, president of the Richmond Fed, is among policy makers not convinced that productivity will slow enough to boost hiring as the economy grows. ``Productivity is the wild card, in that I'm less confident about expected employment growth than I am about expected demand growth,'' he said Oct. 28.

Hours worked rose at a 2.1 percent pace, the most since the third quarter of 1999, compared with a 0.3 percent increase in the second quarter. Output increased at a 4.1 percent rate compared with a 4.2 percent gain in the previous three months.

Among manufacturers, productivity grew at a 4.3 percent pace after rising at an 8.3 percent rate from April through June.

Faced with higher costs for oil and other raw materials, businesses are still intent on maintaining efficiency gains.

Jobless Claims

The number of U.S. workers filing first-time claims for unemployment insurance fell more than forecast last week to a level consistent with more job creation, the separate report from the Labor Department showed today. Economists forecast claims to fall to 340,000, according to the forecast, from a previously reported 350,000.

The four-week moving average of claims dropped to 342,000 from 343,500. Jobless claims have averaged 344,500 a week this year, down from 402,000 in all of 2003, suggesting companies are reluctant to let go of workers.

A separate report released earlier today showed job Postings on the Internet remain robust. The Monster Employment Index, which measures demand for employees based on online recruiting, held in October at the highest level since its inception last year.

The gauge held at 114 for a second month, which is the highest since the start of the index in October 2003, according to Monster Worldwide Inc., the New York-based operator of the biggest Internet job service. Online demand for workers over the last year rose in all but one of the 23 occupations surveyed.

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