updated 6/3/2004 1:34:00 PM ET 2004-06-03T17:34:00

The productivity of America’s workers in the opening quarter of 2004 grew at a brisk 3.8 percent annual rate, faster than previously thought. Labor costs moved up.

Major Market Indices

The increase in productivity — the amount an employee produces for every hour on the job — was up from an initial estimate of a 3.5 percent growth rate for the January-to-March quarter and exceeded the 2.5 percent pace registered in the final quarter of 2003, the Labor Department reported Thursday.

The new reading on first-quarter productivity was slightly better than the 3.7 percent growth rate that some economists were predicting. It marked the best showing since the third quarter of 2003.

Unit labor costs, meanwhile, rose at a 0.8 percent pace in the first quarter, up from the previous estimate of a 0.5 percent pace and following a 1.7 percent rate of increase in the fourth quarter. Unit labor costs is a measure of how much companies pay workers for every unit of output they produce. The recent rise in these costs, should they continue, could put pressure on companies’ profit margins, analysts say.

In other economic news:

  • Consumers shopped with renewed enthusiasm during May following a one-month break, giving many of the nation’s biggest retailers solid sales gains. Companies across retailing sectors reported upbeat results, including Wal-Mart Stores Inc., Costco Wholesale Corp., Limited Brands, Nordstrom Inc., Federated Department Stores Inc. and Talbots Inc. The strong performance was reassuring after consumers pulled back in April amid rising energy costs.
  • Initial claims for unemployment benefits fell last week by a seasonally adjusted 6,000 to 339,000, the Labor Department said in a second report. The decline provided fresh evidence of an improving jobs market. Claims hit a high last year of 444,000 in the middle of April and have slowly drifted downward.
  • Orders to U.S. factories fell 1.7 percent in April, the Commerce Department reported. Although the decline was the largest in a year, it came after a hefty 5 percent increase in orders in March. Orders for big-ticket goods, such as cars and appliances, dropped in April, while demand for nondurable items, such as food and clothes, was flat. Other reports suggest that the manufacturing recovery is progressing well.

On the productivity front, efficiency gains are important to the economy’s long-term vitality. They allow the economy to grow faster without igniting inflation. Companies can pay workers more without raising prices, which would eat up those wage gains.

With the economy on a solid growth track, increasing numbers of business analysts believe the Federal Reserve may increase short-term interest rates for the first time in more than four years at its next meeting June 29-30. The Fed’s main interest rate has been at a 46-year low of 1 percent since last June.

“Now that ULC (unit labor costs) are moving higher, one has to wonder whether Fed officials may begin to worry a little more — as they should — about inflation,” said Steve Stanley, chief economist at RBS Greenwich Capital.

The economy grew at a 4.4 percent rate in the first three months of this year and is expected to grow at a healthy — but possibly slower — pace in the April-to-June quarter, some analysts say. With companies feeling more confident about the staying power of the economic recovery, the jobs picture has been improving.

The nation’s payrolls grew by a sizable 288,000 in April, on top of an even bigger gain of 337,000 in March, signs that the long awaited recovery in the jobs market was finally coming to pass. Some analysts are expecting employment to increase by a net 225,000 in May, which would provide further evidence of the labor market’s improving health. The government releases the employment report for May on Friday.

In the productivity report, companies in the first quarter boosted output at a 5.4 percent rate, stronger than previously estimated and up from a 4.2 percent growth rate in the fourth quarter. Workers’ hours, meanwhile, rose at a 1.5 percent rate, faster than first estimated and following a 1.6 percent growth rate in the fourth quarter.

During the economic slump, gains in productivity came at the expense of workers. Companies produced more with fewer employees. But with the economy rebounding, companies have slowly stepped up hiring and are boosting their efficiencies.

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