US productivity falls

US business productivity fell more than expected in the first quarter as companies stepped up hiring sharply but only modestly expanded output. Non-farm productivity slipped at a 0.9 percent annual rate, the Labour Department said on Wednesday. The decline was both sharper than the 0.5 percent initially reported and the 0.7 percent drop economists expected. It marked a turnabout from a 1.2 percent fourth-quarter gain.
Employers slashed payrolls during the 2007-09 recession, helping fuel a spike in productivity. But the increase faded last year and productivity, which measures how much any worker can produce in an hour, has declined in three of the last five quarters. Over the past four quarters, productivity has risen just 0.4 percent, the smallest gain since early 2009.
The downward revision for the first quarter reflected a somewhat weaker reading on business output and slightly higher reading on hours worked. Despite the weakening in productivity, the increase in unit labour costs - an important gauge of price and profit pressures - was revised downward to a 1.3 percent gain from 2 percent as hourly compensation was not as robust as previously thought.
Compensation and unit labour costs were also revised downward for the fourth quarter, suggesting labour-related inflation pressures were largely contained and possibly providing scope for the Federal Reserve's policy panel to ease monetary policy further to boost the economic recovery.
"The slow rate of growth in labour costs ... suggests that participants on the Federal Open Market Committee won't be compelled to temper the urge to provide more accommodation based on concerns over wage inflation," Ellen Zentner, an economist at Nomura, said in a research note. US financial markets largely ignored the data, with stocks rising on signs European leaders were coming up with a plan to recapitalize Spain's troubled banks.
The worsening debt and banking crisis in Europe has hung like a cloud over the US economy. Economists have cited it as a factor weighing on hiring in the United States. A report on Friday showed US employers added a paltry 69,000 workers to their payrolls last month.
Productivity is a basic building block of growth and a key determinant of living standards, but economists are divided about what its recent weakness will mean for the recovery. One the one hand, it suggests employers have squeezed about all they can out of their current workers and will need to boost hiring. But there is also a darker possibility. Some economists think employers went overboard laying people off during the recession and that last year's acceleration in hiring was a temporary effort to better align workforces with demand. If that process is largely complete, it could imply tepid hiring going forward absent a stronger pick up in demand, a possibility Federal Reserve Chairman Ben Bernanke has raised.