US nonfarm productivity fell in the second quarter as economic activity slackened, while a moderation in the pace of wage growth suggested inflation pressures will remain contained. Productivity slipped at a 0.3 percent annual rate, the Labour Department said on Tuesday, after falling at a 0.6 percent pace in the first quarter.
Unit labour costs grew at a 2.2 percent rate, which was slower than the 4.8 percent pace in the January-March period. Economists had expected productivity, a measure of hourly output per worker, to drop at a 0.8 percent rate and unit labour costs to rise 2.3 percent. "This suggests businesses have largely exhausted the efficiency enhancing measures that resulted in impressive productivity growth over the last two years," said Paul Dales, senior US economist at Capital Economics in Toronto.
Revisions to prior quarters showed productivity growth was slightly stronger in 2010 than earlier reported. The Fed is holding a one-day regular policy meeting against the backdrop of turmoil in global financial markets that has seen a plunge in US and global share prices. Still, most analysts do not expect the US central bank to make any major changes in policy at the meeting.
Equity markets have been pressured be fears of a recession in the United States and a decision on Friday by Standard & Poor's to strip the nation of its triple-A credit rating. There are concerns diminishing share values could sour business and consumer confidence and further impair an already weak economy. A survey on Tuesday showed a lack of confidence among small businesses in the country's recovery.
The National Federation of Independent Business' Optimism Index fell 0.9 point in July to 89.9, largely because of weaker expectations for real sales gains and reduced hope for an improvement in business conditions in the next six months. The slowdown in productivity mirrors a sharp slowdown in economic growth during the first half of the year. The economy grew at a 1.3 percent annual rate in the second quarter after a meagre 0.4 percent rise in the January-March period.
Normally, a slowdown in productivity implies that businesses have to add new workers to raise output. Against the backdrop of weak economic growth, it suggests businesses might have to cut costs to protect profits. Productivity grew rapidly as the economy emerged from the 2007-09 recession, peaking at an 8.0 percent growth rate in the second quarter of 2009. The gains were driven by companies' cutting costs through maintaining lean staffing levels. While unit labour costs have risen so far this year after dropping at a record 2.0 percent for whole of 2010, inflation is not much of a threat given a 9.1 percent unemployment rate.
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