Productivity declines in fourth quarter

/ Source: The Associated Press

The efficiency of American workers actually declined in the final three months of 2005, the first time that has happened in more than four years, while wage pressures accelerated.

Americans’ productivity, a key determinant of rising living standards, dipped at an annual rate of 0.5 percent in the October-December quarter, while wages rose at a 3.3 percent pace, the fastest gain in a year, the Labor Department reported Tuesday. Both figures were slightly revised from original estimates a month ago which had productivity falling at a 0.6 percent rate and wage costs rising at a 3.5 percent rate in the fourth quarter.

The 0.5 percent drop in productivity, the amount of output per hour of work, was the first quarterly decline since a 0.6 percent fall in the first quarter of 2001, when the country slipped into a recession. Analysts said the latest decline was not as ominous and mainly reflected a temporary slowdown in overall economic growth caused by the hurricanes and surging energy prices.

The economy is expected to have bounced back sharply in the current January-March quarter, which will translate into improving productivity.

Some economists believe that the sluggish 1.6 percent growth rate for the overall economy in the October-December quarter will be followed by growth, perhaps above 5 percent, in the first three months of this year.

Brian Bethune, chief U.S. economist for forecasting firm Global Insight, said he expected productivity to rebound to a rate of 3.8 percent in the January-March period, reflecting stronger economic growth after the shocks of the fourth quarter.

“The economy is still generating respectable productivity growth and this is expected to assist in terms of holding down the growth of core inflation in 2006,” he said.

The slight upward revision in the productivity number reflected the fact that overall economic growth was revised up to the 1.6 percent rate from an initial estimate of a lower 1.1 percent growth rate.

For the whole year, productivity increased by 2.9 percent in 2005 following an increase of 3.4 percent in 2004. It was the slowest annual increase since a 2.4 percent rise in 2001.

Wage increases, as measured by unit labor costs, rose by 2.6 percent in 2005, more than double the 1.1 percent increase for 2004. It was the fastest rise in labor costs since a 4.2 percent jump in 2000.

The Federal Reserve is closely watching the performance of wages to make sure that rising wage pressures do not translate into higher inflation overall.

Analysts said even with the changes last year, productivity is still rising at a solid pace. That should allow wages to rise without putting undue pressure on inflation.

Rising productivity is the key factor behind increases in the standard of living because it allows employers to pay workers more because of the increased output without having to raise the price of their products.

Since the mid-1990s, productivity has accelerated as the economy has benefited from the growing use of computers and other high-tech tools.

Former Fed Chairman Alan Greenspan was one of the first economists to recognize that productivity was accelerating after two decades of sub-par growth. He convinced his Fed colleagues a decade ago that the unemployment level could fall to lower levels without generating higher inflation.