US businesses boosted their productivity strongly in the second quarter but it was at the expense of weakening labour market, government reports on Thursday showed. The Labour Department said business productivity surged at a revised 4.3 percent annual rate, nearly double the 2.2 percent gain previously reported and well ahead of forecasts for a 3.5 percent increase.
Companies have cut payrolls in each of the first seven months this year and an intently awaited report on Friday is expected to show that they did so again in August. A separate report from the Labour Department confirmed a steadily weakening labour market as the number of US workers filing new claims for jobless benefits jumped by 15,000 last week to a seasonally adjusted 444,000. That was much higher than the 425,000 claims that analysts surveyed by Reuters had anticipated and sent stock futures prices down. But prices for US Treasury debt extended gains as investors bet it meant that the Federal Reserve will keep interest rates low.
Another report from ADP Employer Services on Thursday showed private employers cut 33,000 jobs in August, which analysts said increased chances that Friday's payroll report from the Labour Department will be weak. Analysts said the higher productivity was encouraging, since it keeps inflation in check and could help support business profits at a time of soaring costs.
"We don't have worry about a wage spiral but we do have worry about consumer purchasing power," said economist Christopher Low of FTN Financial in New York. "Given the credit conditions, spending power is going to be a real problem the rest of this year and into next year."
The report on productivity, which is a gauge of hourly output per worker, showed companies keeping a tight grip on costs by keeping their payrolls lean. Unit labour costs, a gauge of inflation and profit pressures closely watched by the Federal Reserve, contracted by 0.5 percent in the second quarter after rising 1.2 percent in the first three months this year. Worker hours were trimmed by 0.8 percent in the second quarter after being cut 1.7 percent in the first quarter. Analysts said the US unemployment rate probably will keep moving higher as a sluggish economy encourages companies to lay off rather than to hire.
Service sector expands slightly: The US service sector expanded slightly in August, according to a report released on Thursday that also showed more contraction in employment and reduced inflation pressures. The Institute for Supply Management said its non-manufacturing index came in at 50.6 for August from July's 49.5. A reading above 50 signals expansion. The August reading was the first expansion in the sector since 51.7 in May.
Economists expected an unchanged result of 49.5, according to the median of forecasts in a Reuters poll. The majority of the 79 forecasts ranged from 48.5 to 50.5. While services moved into expansion territory, analysts said the index still pointed to anemic economic growth. "Like most information released of late, the underlying trend of the ISM non-manufacturing data is consistent with an economy that is losing momentum," said Joshua Shapiro, chief US economist at MFR Inc in New York, adding "we look for some retracement in the months ahead."
The employment activity index showed contraction in August for the seventh time in the last eight months, falling to 45.4 from 47.1 in July. The prices paid index continued to show easing inflation pressures, falling to 72.9 in August from 80.8 in July and from 84.5 in June, which was the highest in the 11-year history of the index.
The new orders index rose to 49.7 in August from 47.9 in July. US Treasuries temporarily trimmed gains following the release of the report, while stocks remained relatively steady at lower levels. The service sector represents about 80 percent of US economic activity, including businesses such as banks, airlines, hotels and restaurants.