Productivity Gains Slow To Crawl Tiny Increase Blamed On Continued Hiring Frenzy

Growth in American workers’ productivity slowed to a lackluster pace in the April-June quarter, but labor costs remained contained, posing little threat of inflation.

Nonfarm business productivity - output per hour worked - grew at a seasonally adjusted annual rate of just 0.6 percent in the second quarter, the Labor Department said Tuesday.

That was less than half the 1.4 percent annual rate during the first three months of the year and the worst showing since the third quarter of 1996 when productivity declined.

The deceleration occurred because employers did not curb their pace of hiring to match a slowdown in economic growth from a robust 4.9 percent rate in the first quarter to a moderate 2.2 percent rate in the second, said economist Elliott Platt of Donaldson, Lufkin & Jenrette Securities Corp. in New York.

“Businessmen didn’t really want to slow the rate of hiring largely on the expectation that the economy would bounce back in the second half of the year,” he said.

Wall Street reacted warily to the report. After rising as much as 30 points in the morning, the Dow Jones average of 30 industrial stocks tumbled 101.27 points for the day, closing at 7,960.84 - below 8,000 for the first time in three weeks.

The paltry productivity advance, on its own, could have been discouraging from an inflation standpoint. It would have implied businesses might raise prices in order to increase wages, because workers are producing only a little bit more in each hour of work.

However, growth in hourly compensation also slowed markedly, from a 4.5 percent annual rate in the first quarter to a 3.1 percent rate in the second. That, in turn, restrained labor costs per unit of output - a key ingredient in price pressures. They increased at a 2.4 percent rate in the second quarter, down from 3.1 percent in the first.

“Labor costs remain contained and do not pose an inflation threat to the economy,” said economist Cheryl R. Katz of Merrill Lynch in New York.

Rapid productivity gains - exceeding 3 percent a year - supported the economic boom of the 1960s. But, since the early 1970s, productivity growth has averaged only about 1 percent a year. It was 1.3 percent in 1996 and 0.2 percent in 1995.

However, many analysts aren’t especially concerned about the recent figures because they believe actual productivity improvement is much better than the government reports.