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Tuesday May 8, 5:53 pm Eastern Time

U.S. Productivity Drops 0.1 Percent

U.S. Productivity Drops for the First Time in Six Years, Falling at a 0.1 Percent Rate

By JEANNINE AVERSA

Associated Press Writer

WASHINGTON (AP) -- American workers' productivity in the first quarter fell for the first time in six years as the economy weakened. Some analysts wondered whether big productivity gains, a key measure of rising living standards, may be coming to an end.

The Labor Department reported Tuesday that productivity -- the amount of output per hour of work -- declined at a seasonally adjusted annual rate of 0.1 percent in the January-March quarter. In the fourth quarter, productivity grew at a 2 percent rate.

Unit labor costs, a gauge of inflation pressures, jumped by a 5.2 percent rate in the first quarter, the fastest pace in more than three years. But economists didn't believe that would deter the Federal Reserve from cutting interest rates for a fifth time this year when policy-makers meet next Tuesday.

On Wall Street, the productivity report added to investors' anxiety about the economy. The Dow Jones industrial average closed down 51.66 points at 10,883.51, recovering from a 100-plus point decline earlier in the day.

The drop in productivity surprised analysts, who were expecting productivity to grow in the first quarter, just at a slower rate of around 1 percent. It was the first decline since productivity fell at a 0.8 percent rate in the first quarter of 1995.

In general, productivity tends to rise strongly when the economy is booming, but gains in productivity can become very weak or fall when the economy slows as it did beginning in the second half of last year.

But until the first quarter, productivity grew solidly during the economic slowdown, rising at rates of 3 percent and 2 percent in the third and fourth quarters, respectively. That bolstered the view among some economists that strong productivity gains of recent years are long lasting, rather than simply the fruit of a booming economy.

Some economists said that if the weak showing in productivity as seen in the first quarter is repeated in coming quarters, that may poke a hole in the theory that the sizable pickup in productivity growth over the last several years represents a lasting, structural change in the economy.

``We're now seeing the productivity miracle is somewhat less miraculous than earlier thought,'' said Paul Kasriel, chief economist at Northern Trust Co.

Sung Won Sohn, chief economist at Wells Fargo, said: ``If productivity gains falter and remain poor in coming quarters, it would cast doubt on the idea of a new paradigm.''

But Federal Reserve Chairman Alan Greenspan, in an April 27 speech, said productivity would probably moderate because of the weaker economy, but that the lull should be only temporary.

Greenspan, in the speech, indicated he still believed that massive investments in computers and other high-tech equipment in recent years had permanently improved the outlook for productivity.

Others are also hopeful about the longer-term outlook for productivity.

``The productivity slowdown is a one-time cyclical affair due to the malaise that has engulfed the economy since last summer,'' said National Association of Manufacturers President Jerry Jasinowski. ``As we move into recovery late this year, productivity should ramp up closer to the impressive rates witnessed last year.''

From 1973 through 1995, productivity averaged lackluster gains of just above 1 percent per year. However, since 1995 increases have more than doubled, allowing companies to pay workers higher salaries without raising the prices of their products.

For all of 2000, productivity surged 4.3 percent, the best showing since 1983.

White House spokesman Ari Fleischer said first-quarter productivity figures ``are an additional sign of weakness in the economy'' and offer another reason why Congress should quickly pass tax-relief to help shore up economic growth.

Gains in productivity are the key to rising living standards because they allow wages to increase without triggering higher inflation that would eat up those wage gains. If productivity falters, however, pressures for higher wages could force companies to raise prices, triggering inflation.

While concerned about creeping inflation, Stuart Hoffman, chief economist at PNC Financial Services, believed that the weak job market would temper labor costs in the months ahead.

Over the last 12 months, labor costs rose 3.1 percent while productivity grew 2.8 percent.

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On the Net:

Productivity report: http://www.bls.gov/news.release/prod2.toc.htm

-- (M@rket.trends), May 09, 2001

Answers

In a related story:

Wednesday May 10, 2:27 am Eastern Time

U.S. CEO and Managerial Productivity Drops 0.5 Percent

U.S. CEO and Managerial Productivity Drops for the Sixth Time in Six Years

WASHINGTON -- American executives' productivity in the first quarter fell for the sixth time in six years.

The Labor Department reported Tuesday that Executive Productivity -- the amount of output per hour of work, minus golf, lunches, and sucking-up sessions -- declined at a seasonally adjusted annual rate of 0.5 percent in the January-March quarter. In the fourth quarter, Executive Productivity also declined at a 0.5 percent rate.

The drop in productivity didn't surprise analysts, who were expecting Executive Productivity (EP) to decline in the first quarter, just as it had in the forty quarters before that.

"Most Boards of Directors don't care all that much. They'll still give the CEO a 50 percent raise for running the company into the ground. That's the new paradigm," said Paul Kasriel, chief economist at Northern Trust Co.

Sung Won Sohn, chief economist at Wells Fargo, said: "If EP gains falter and remain poor in coming quarters, the companies will obviously have to increase executive benefits and separation packages."

But Federal Reserve Chairman Alan Greenspan, in an April 27 speech, said EP is probably in a holding pattern, but that the lull should be only temporary.

Greenspan, in the speech, indicated he still believed that massive investments in expense accounts, Golden Parachutes, and company-owned villas in St. Croix in recent years had permanently improved the outlook for productivity. "It doesn't matter much," he said. "When you sit in the oak-paneled office, you can be as incompetent as you want so long as your buddies are on the Board."

-- Cynical? Who, Me? (Yesterday, Today,@And.Tomorrow), May 10, 2001.