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U.S. productivity rises
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September 5, 2001: 9:20 a.m. ET
2Q figure revised downward, but edges past economists' estimates
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NEW YORK (CNNfn) - Worker productivity in the United States rose during the second quarter at a slightly slower pace than initially thought, the government said Wednesday, though the rate was stronger than Wall Street had expected.
Productivity, a measure of worker output per hour, rose at a revised 2.1 percent annual rate in the quarter, the Labor Department said, compared with its previous estimate of a 2.5 percent rate. Economists surveyed by Briefing.com expected a revised reading of 2.0 percent.
Productivity, closely watched by Federal Reserve Chairman Alan Greenspan, rose at a scant 0.1 percent rate in the first quarter, reflecting a year-long economic slowdown and making the second quarter surge more impressive.
"Productivity has slowed during the past year because output has fallen more quickly than employment and hours have been trimmed," said Steven Wood, economist with FinancialOxygen.
U.S. stock futures showed little reaction to the news, continuing to trade slightly higher, while Treasury bond prices were little changed.
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Businesses cut workers' hours at a 2.6 percent rate, the Labor Department said, the biggest drop since the first quarter of 1991. Output fell at a rate of 0.5 percent, the first decline since the first quarter of 1993.
In response to sagging demand, businesses have laid off hundreds of thousands of workers. The manufacturing industry was hardest hit by the slowdown, cutting payrolls by more than 800,000 in the 12 months ending in July.
The Fed has cut its target for short-term interest rates seven times this year in an effort to keep consumers spending despite all the job cuts and thus avert a recession.
Economists were expecting a downward revision to productivity because the economy also had grown far more slowly in the second quarter than the government had initially thought. Last week, the government reported the economy grew at its slowest pace in eight years, barely expanding at a 0.2 percent rate, versus the 0.7 percent growth rate originally reported.
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 force companies to raise prices, thus worsening inflation.
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The lower productivity estimate resulted in unit labor costs being revised upward. Unit labor costs, a gauge of inflation pressures, rose at a 2.7 percent rate in the second quarter. Though higher than the 2.1 percent rate previously estimated, it was still the smallest increase in a year and a significant drop from the first quarter's 5.0-percent rate.
"Slack demand and intense competition are preventing companies from raising prices," Wood said.
Fed Chairman Greenspan has said he remains bullish about the long-term prospects of productivity growth even though businesses, responding to the slowdown, have pared back investment in computers and other productivity-enhancing equipment.
From 1973 to 1995, productivity averaged lackluster gains of just above 1 percent per year. But since 1995, increases have more than doubled.
Economists continue to debate whether the healthy productivity gains seen after 1995 represent a "new economy," meaning a lasting, structural change driven in large part by businesses making massive investments in high-tech equipment. Conversely, they question whether the gains were simply the fruit of economic boom times in which companies pushed workers more to meet rapidly rising demand. 
- from staff and wire reports
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