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06/05 12:28

U.S. Economy: 1st-Qtr Productivity Fell at 1.2% Rate (Update1)

By Siobhan Hughes

Washington, June 5 (Bloomberg) -- U.S. worker productivity declined from January through March for the first time in six years as economic growth slowed, government figures showed. Labor costs surged as a result.

The measure of how much an employee produces for every hour worked fell at a 1.2 percent annual rate in the first quarter, the Labor Department said. That was worse than the 0.1 percent rate of decline initially estimated and the first drop since January-March 1995.

Productivity fell because companies were slow at the start of the year to fire employees and reduce hours as they were cutting production. ``Companies held on to workers as long as they possibly could, and when there was no sign of a short-term recovery in the economy, then it was time to slash workers,'' said Richard Yamarone, senior economist at Argus Research Corp. in New York.

Unit labor costs, a measure of business expenses tied to productivity, rose in the first quarter at a 6.3 percent pace, the fastest since the fourth quarter of 1990.

Companies from Citigroup Inc. to Minnesota Mining & Manufacturing Co. have begun eliminating jobs to boost efficiency as demand for their services and products wanes. Federal Reserve policy makers and economists are optimistic businesses will keep striving to improve efficiency, though the gains may not be as strong as they were in the late 1990s.

Non-Manufacturing Slowdown

There's little evidence of a quick turnaround in economic growth. The National Association of Purchasing Management's non- factory business index fell to 46.6 last month, the lowest on record, from 47.1 in April. A reading below 50 suggests business is contracting.

And orders placed with the nation's factories fell 3 percent in April, Commerce Department figures showed. Excluding transportation equipment, orders dropped 1.7 percent, the fourth decrease in five months. Manufacturers reported declines in bookings for aircraft, automobiles, computers and semiconductors.

Still, analysts are expecting a pickup in economic growth later this year that will lead to additional gains in worker efficiency. ``The productivity miracle we experienced in the late- 1990s may be winding down but it's not the end,'' Yamarone said. The decline in efficiency was the biggest since the first quarter of 1994.

Fed Chairman Alan Greenspan said last month that forces constraining business investment in productivity enhancing equipment are ``fizzling out.'' Once they do, demand for computers, telecommunications gear and software ``should again strengthen demand for capital equipment and restore solid economic growth,'' Greenspan said.

Consumer Confidence

A Bloomberg News survey of consumers showed a rise in optimism about the economy's prospects. The Bloomberg confidence index registered 83.8 this month, up from 82.4 in April, the time of the last poll.

While the survey showed concern about job security and the current state of the economy, more respondents said it's a good time to buy stocks, a house or a car compared with the previous survey. That suggests they're counting on five interest-rate reductions so far this year by Fed policy makers to help the economy rebound.

Government securities rose after the factory and non- manufacturing reports suggested the economy will be slow to rebound. The 10-year Treasury note rose 3/8 point, pushing down its yield 5 basis points to 5.29 percent.

Stocks gained as semiconductor manufacturer Xilinx Inc. said order cancellations have ``slowed considerably.'' The Dow Jones Industrial Average rose 68 points, or 0.6 percent, while the Nasdaq Composite Index climbed 64 points, or 3 percent.

Resisting Inflation

Rising productivity lowers the cost of doing business and enables the economy to grow without triggering an inflation outbreak. In the second half of the 1990s, productivity rose at about 2.5 percent a year, accounting for more than half of the economy's growth rate, after averaging about 1.6 percent a year during the previous 25 years.

Some analysts are optimistic that companies will keep innovating to remain competitive. In the last two months, companies eliminated jobs after the economy slowed in the first quarter, government figures showed. Businesses reduced payrolls by 19,000 in May after cutting 182,000 jobs a month earlier. In the first quarter, 484,000 workers were added to company payrolls.

Entrust, Citigroup

Entrust Inc., an Internet security software maker, is an example of companies trying to boost productivity by cutting jobs. The company said yesterday it would cut 30 percent of its workforce to reduce expenses and become profitable.

Rising labor costs hurt profits if companies aren't able to charge more for their goods and services. After-tax corporate profits dropped at a 3.1 percent annual rate in the first three months of the year after dropping at a 4.3 percent annual rate in the final months of 2000, the government reported last month. The last time profits declined for two straight quarters was in the second half of 1998.

At Citigroup, the largest U.S. financial services company, first-quarter profit fell 7 percent as expenses outpaced revenue growth and earnings from its own investments plunged. Citigroup has planned job cuts for the second quarter, according to Chairman Sanford I. Weill.

The revision to first-quarter productivity reflected slower output than previously reported and more hours worked than first thought. Hours worked rose at a 2.2 percent annual rate in the first quarter, previously reported as rising at a 2 percent pace. Output rose at a 1 percent pace, last reported as rising at a 1.9 percent rate.

The slower pace of output came as the U.S. economy grew at a 1.3 percent annual pace in the first quarter, less than the 2 percent pace first estimated and a sign that some of the recent productivity gains were due to rising demand.

Companies haven't quit seeking ways to improve. 3M, which makes products including Post-It Notes and circuit boards, last week said it plans to increase profit by as much as $450 million before taxes over two years by raising productivity and cutting costs.

3M Chief Executive James McNerney, who has implemented a productivity program that he used while running General Electric Co.'s aircraft-engines business, said he expects the profit increase by the end of the second full year of the program's operation.

-- (M@rket.trends), June 05, 2001