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U.S. productivity jumps
August 7, 2001: 1:31 p.m. ET

American workers produced more per hour in the second quarter
graphic graphic
NEW YORK (CNNfn) - American worker productivity rose at its fastest pace in a year in the second quarter, the government said Tuesday, indicating U.S. standards of living rose while inflation remained tame.

Productivity, a measure of worker output per hour, rose at a 2.5 percent annual rate in the quarter, the Labor Department said, after rising a revised 0.1 percent in the first quarter. Wall Street forecasts were for an increase of 1.6 percent, according to economists surveyed by

Meanwhile, unit labor costs rose a mild 2.1 percent after jumping 5 percent in the first quarter, the report said, indicating that inflation pressures are well in check. Wall Street analysts expected a rise of 3.4 percent.

Separately, the Federal Reserve reported outstanding consumer credit fell in June for the first time since November 1997, dropping $1.5 billion, compared with a revised $6.8-billion gain in May. Wall Street analysts expected a gain of $7.8 billion, according to

On Wall Street, stock stocks turned mixed in afternoon trading while Treasury bond prices were little changed.

The productivity gain was the biggest since the second quarter of 2000, when productivity rose at a 6.3 percent rate.

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graphicCNNfn's David Haffenreffer takes a look at the second-quarter productivity numbers and what they mean for the U.S. economy.
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"[It was] a good deal better than expected and I think very encouraging," said David Blitzer, chief investment strategist at Standard & Poor's.

The department also revised data to show the boom in productivity has been less pronounced than had been believed. From 1996 to 2000, productivity growth averaged 2.5 percent, compared with the 2.8 percent previously reported.

The revisions, combined with recent low numbers, led to some worries that the strong productivity gains of recent years were an anomaly and the "new economy" was a thing of the past. Most economists, however, are not concerned.

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"There has been talk recently about how, because productivity was revised down last year, it would belie the productivity miracle of the recent past," said Bruce Steinberg, chief economist with Merrill Lynch. "We believe today's data indicate that this is not happening."

Gains in productivity are the key to rising living standards because they allow wages to increase without triggering inflation that would eat up those wage gains. If productivity falters, however, pressures for higher wages could forces companies to raise prices, thus worsening inflation.

Between 1973 and 1995, productivity averaged lackluster gains of just above 1 percent per year. But since 1995, increases have more than doubled, allowing companies to pay workers higher salaries without raising the prices of their products.

Federal Reserve Chairman Alan Greenspan told Congress last month that he remains bullish about the long-term prospects of productivity growth and that the tiny gain in productivity seen in the first quarter represented only a temporary lull and was a byproduct of the sagging economy.

The Fed has cut its target for short-term interest rates six times this year, from 6.5 percent to 3.75 percent, to keep American consumers spending and avoid a recession.

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The Fed also is charged with avoiding inflation, but inflation hasn't been a problem yet, and Tuesday's data indicate that's still the case.

"From the Federal Reserve vantage point, the productivity numbers are favorable and will continue to provide the Fed a comfort level in its aggressive easing stance," said Kevin Flanagan, Treasury market strategist at Morgan Stanley. "There's no mistaking we're closer to the end of that cycle, but numbers like this will help to alleviate these anxieties."

And the unexpected decline in consumer credit could also encourage the Fed to continue its easing policy. Consumer spending, which makes up two-thirds of U.S. economic activity, has kept the economy afloat during the latest slowdown. The decline in credit is an ominous signal that the consumer could be losing hope.

Most of the credit decrease in June was in the nonrevolving sector, of which a bit more than half is made up of debt associated with auto loans. Nonrevolving debt fell by $3.8 billion in June, the first decline since April and the largest drop since October 1991. graphic

-- from staff and wire reports


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