updated 6/6/2007 6:06:54 PM ET 2007-06-06T22:06:54

The productivity of American workers slowed sharply in the first three months of this year and wage pressures rose at a faster pace than expected, raising inflation concerns on Wall Street.

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The Labor Department reported that the amount of output per hour of work for nonfarm businesses rose at annual rate of 1 percent in the January-March quarter. That was the slowest advance since the third quarter of last year and was below the government’s initial estimate that productivity rose at a 1.7 percent rate in the first quarter.

Labor costs rose at an annual rate of 1.8 percent. That was up from an initial estimate of 0.6 percent growth in unit labor costs and was higher than the 1.3 percent increase Wall Street had been expecting.

Stocks fell for a second straight session as the worse-than-expected jump in labor costs stirred inflation concerns. The Dow Jones industrial average dropped 129.79 points to close at 13,465.67.

Economists, however, were not as concerned by the labor cost reading, noting that it still reflected a significant slowdown after a huge 8.9 percent rate of increase in the final three months of last year. That gain was attributed to big end-of-year bonus payments.

“The growth of compensation is not accelerating,” said Brian Bethune, an economist at Global Insight, a private forecasting firm. “This issue should not cause any unnecessary ruffling of feathers over at the Federal Reserve.”

While higher wages are good for workers, increases that outstrip the growth of productivity can trigger unwanted inflation as employers are forced to boost the cost of their products to meet their higher payroll costs.

Rising productivity means employers can boost salaries because of workers’ increased efficiency. It is the single most important factor supporting rising living standards.

The revision to productivity in the first quarter reflected the sharp downward revision to overall economic growth, which got slashed to 0.6 percent from an initial estimate of 1.3 percent.

The Fed pushed interest rates higher for two years in an effort to slow the economy and keep inflation under control. The central bank has not raised rates in a year and many analysts believe Fed officials will stay on the sidelines for the rest of this year, waiting to see if they have done enough to produce an economic soft-landing.

Despite the year’s weak start, recent indicators have bolstered the view that the economy began to rebound in the spring even as housing problems lingered.

In a new economic forecast, the National Association of Realtors predicted Wednesday that sales of existing homes will fall by 4.18 percent this year, lowering a previous forecast that had called for a 2.9 percent decline this year.

“Home sales will probably fluctuate in a narrow range in the short run, but gradually trend upward with improving activity by the end of the year,” said Lawrence Yun, the Realtors’ chief economist.

He predicted that sales, which had set records for five straight years before falling in 2006, will resume rising in 2008, increasing by a projected 3.7 percent.

Meanwhile, the Bush administration released an updated economic forecast for 2007, predicting the economy will grow by 2.3 percent this year, when measured from the fourth quarter of last year. That is down from a forecast of 2.9 percent the administration made six months ago. Officials said the lower figure reflected the much slower growth that occurred in the first three months of this year.

Fed Chairman Ben Bernanke said in a speech Tuesday that he believed the economy would strengthen as the year progresses, comments read by Wall Street as lessening the chances for a rate cut to boost a lagging economy.

The 1 percent rise in productivity in the January-March quarter was below the 1.6 percent average growth rate of last year, and that figure was a drop from the 2.1 percent increase in 2005.

Analysts are watching productivity carefully to see whether a rebound in efficiency starting in the mid-1990s was a temporary spurt or the start of a longer-range trend.

Copyright 2007 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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