Trade Deficit Widens While Productivity Gains Stall Jump In Unit Labor Costs May Help To Convince Fed To Boost Interest Rates

Two of the economy’s weak spots were highlighted Tuesday in reports showing the U.S. trade deficit widened sharply in the second quarter while growth in productivity, the key to rising living standards, showed only a modest increase.

The Commerce Department said the deficit in the current account, the broadest measure of U.S. trade, jumped to $38.8 billion in the AprilJune quarter, the worst showing in a year, as higher oil and merchandise imports swamped a big gain in U.S. farm exports.

Meanwhile, the Labor Department reported that productivity, the measure of output per hour of work, edged up at an anemic annual rate of 0.5 percent in the second quarter.

A month ago, the government’s preliminary estimate said secondquarter productivity had actually declined by 0.1 percent. But analysts took little encouragement from the upward revision, saying that there is no sign that the country is breaking out of the vise of stagnant productivity that has constrained personal incomes for more than two decades.

Productivity is viewed as the key to raising living standards. Higher productivity means that workers are producing more per hour of work, allowing employers to reward them with wage increases without threatening higher inflation.

For the first 70 years of this century, non-farm productivity rose at an annual rate averaging 2.2 percent. But from 1973 through 1995, the productivity increases have averaged just 1 percent. In 1994 and 1995, the gains have been just 0.5 percent and 0.7 percent.

Labor Secretary Robert Reich released a new report Tuesday that contended increasing the average educational level of employees within a manufacturing plant by one year would increase productivity at the plant by 8 percent.

“There is a potentially large payoff in investment in skills,” he said.

Compared with the small gain in productivity in the second quarter, Tuesday’s report showed that unit labor costs, which account for twothirds of total production costs, were rising at an annual rate of 3.2 percent, more than double the 1.5 percent first-quarter increase.

Mark Zandi, an economist at Regional Financial Associates in West Chester, Pa., said the jump in unit labor costs was likely to set off alarm bells at the Federal Reserve about increasing inflationary pressures.

“If unit labor costs are rising it suggests that inflation will accelerate six to nine months down the road. This has got to make the Fed nervous,” he said.

The second-quarter current account deficit was 11.2 percent higher than the first-quarter imbalance and left the current account deficit running at an annual rate of $147.3 billion, very close to where it has been stuck for the past two years.

The current account is considered the best measure of America’s international standing because it includes not only trade in goods and services, which are reported on a monthly basis, but also investment earnings and foreign aid.