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U.S. productivity tumbles
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June 5, 2001: 11:02 a.m. ET
Output per hour shrank at 1.2% rate in 1Q, biggest decline in eight years
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NEW YORK (CNNfn) - American worker productivity fell by the largest percentage in eight years during the first quarter, the government said Tuesday, a hint that the sharp slowdown in the world's largest economy might not end soon.
Productivity, a measure of worker output per hour, fell at a revised 1.2 percent annual rate in the quarter, the Labor Department said, the steepest falloff since a 5 percent slump during the first three months of 1993, after growing a revised 2 percent in the fourth quarter. Wall Street forecasts were for a revised drop of 0.7 percent after the initially reported 0.1 percent dip, according to Briefing.com.
In its report, the Labor Department also said labor costs rose at the fastest pace in nearly four years during the quarter.
Separately, the Commerce Department said factory orders fell 3 percent in April after gaining a revised 0.7 percent in March. Wall Street analysts expected a drop of 2.7 percent, according to Briefing.com.
"(These data are) bad news for (corporate profit) margins or future inflation -- or both," said Ian Shepherdson, chief U.S. economist with High Frequency Economics Ltd.
On Wall Street, investors largely shrugged off the weak numbers and pushed stocks higher in early trading, while U.S. Treasury prices retreated from early gains.
Watching the Fed
The Federal Reserve has cut rates five times this year -- each time by an aggressive half percentage point -- in a bid to revive the sluggish economy and avoid a recession.
Slowing productivity and rising labor costs could make the Fed less aggressive when it considers cutting interest rates at its meeting scheduled for June 26-27.
Fed Chairman Alan Greenspan watches the productivity numbers closely, economists say, since rising productivity helps companies boost output and profits, and keep a lid on wage costs.
So far, Greenspan has predicted productivity would weaken as the economy slowed and has said the lull would be only temporary. Former Fed Vice Chairman Alan Blinder, now a professor at Princeton University, agreed.
"Never treat only one productivity number that seriously," Blinder told CNNfn's Money Gang program. "What you have to remember is that productivity has always been very cyclical. When the economy sags, productivity sags."
Blinder said the economy has obviously been sagging and remains in a precarious position. (348K WAV) (348K AIFF)
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.
From 1973 through 1995, productivity averaged lackluster gains of just above 1 percent per year. But since 1995, increases have more than doubled, allowing companies to pay higher salaries without raising prices.
"Although productivity is not likely to return to the supercharged pace of last year, it is likely to settle in comfortably above the 1.5 percent average pace during the 20 years before 1995," said Steven Wood, chief economist at FinancialOxygen.
Corporate profits in a tailspin
In its report, the Labor Department also said unit labor costs, a key gauge of inflationary pressure in the economy, rose at a 6.3 percent rate in the quarter, up from a revised 4.5 percent rate the prior quarter. It was the biggest increase since a 5.5 percent jump in the fourth quarter of 1997.
Last month, the government initially estimated that unit labor costs rose at a 5.2 percent rate in the first quarter.
Combined with the falling productivity, these costs put a dent in corporate profits in the first quarter, which could lead to decreased corporate spending, a tighter job market and sagging consumer confidence.
"With profits in such a tailspin, I'm revising down my capital expenditure outlook for the next six to nine months, and (I see) almost zero job growth for rest of this year," said Maureen Allyn, chief economist with Zurich Scudder Investments.
At least economists aren't worried about inflation; despite the sharp rise in first-quarter unit labor costs, which followed a 4.5 percent rate of increase in the fourth quarter, many economists, including Greenspan, have said they expect the economic slowdown will ease inflation pressures.
Factory orders fall
In fresh evidence of that slowdown, orders to U.S. factories fell 3 percent to a seasonally adjusted $336.94 billion in April, the government said, hurt by weaker demand for a range of costly items from new cars to computers.
The decline implies a soft start to second-quarter economic performance, as fewer orders mean the nation's beleaguered manufacturing sector will be producing less.
Shipments of finished products, which reflect current levels of factory activity, fell 2.5 percent to $338.95 billion in April after a 0.1 percent decrease in March. 
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