Productivity gain raises hope companies will boost work force

WASHINGTON -- The productivity of America's workers grew modestly in the final three months of 2003, raising hopes that companies will step up hiring to meet demand rather than relying solely on increased efficiency.

The Labor Department reported Thursday that productivity -- the amount an employee produces for every hour on the job -- grew at a 2.7 percent annual rate from October through December. Although that was a slowdown from the 9.5 percent rate for the three previous months, it nevertheless was a respectable pace that bodes well for the economy's recovery, analysts said.

"You can squeeze only so much juice out of an orange. There is no question that businesses -- seeing demand grow -- are hiring more people in response to slowing productivity gains," said Wells Fargo's chief economist Sung Won Sohn. "But how many people will be hired going forward -- that is really a debatable question."

For all of 2003, productivity grew by 4.2 percent, following a 4.9 percent increase in 2002.

Productivity gains are important to the economy's long-term vitality. They allow the economy to grow faster without setting off inflation. Companies can pay workers more without raising prices, which would eat up those wage gains. Productivity can bolster a company's profitability.

As profits improve, companies may be more willing to boost capital investment and hiring.

Economists are predicting the nation's payrolls grew by around 180,000 jobs in January, compared with a net gain of 1,000 jobs in December. The government was releasing the employment report for January on Friday.

Analysts are hopeful that companies -- after having squeezed so much efficiencies out of existing workers last year -- will expand their ranks of workers in the months ahead to meet customers' demand.

There were some encouraging signs to this end in Thursday's report.

In the fourth quarter, companies' output increased at a 4.2 percent annual rate, compared with a 10.4 percent rate in the third quarter.

Companies added 144,000 workers to their payrolls in the fourth quarter and hours worked rose at a rate of 1.5 percent. That was the largest increase since the first quarter of 2000 and compared with a 0.8 percent growth rate in the third quarter of last year.

During the economic slump, gains in productivity came at the expense of workers. Companies produced more with fewer employees. Although companies are still keeping their work forces relatively lean, they did pump out more with a modest increase to payrolls in the fourth quarter.

Federal Reserve Chairman Alan Greenspan and his colleagues expressed optimism last week that the jobs climate is getting better. "Although new hiring remains subdued, other indicators suggest an improvement in the labor market," they said.

The increase in productivity in the fourth quarter helped push down companies' labor costs, which fell at a rate of 1.3 percent, following a 5.6 percent rate of decline in the prior quarter. Falling labor costs bode well for companies' profit margins.

Workers benefited, too. Hourly compensation -- including wages and benefits -- grew at a 1.3 percent rate in the fourth quarter, on top of a 3.4 percent growth rate in the third quarter.

Analysts were predicting productivity to slow in the fourth quarter as economic growth moderated. The economy grew at a 4 percent annual rate in the final quarter of 2003, down from 8.2 percent in the prior quarter. That marked the best performance in nearly two decades.

In other economic news:

--new claims for unemployment benefits rose last week by a seasonally adjusted 17,000 to 356,000, the Labor Department said. Some of the increase was related to bad weather in some states, which caused weather-sensitive companies to lay off workers, a government analyst said.

Even with the rise, claims have been below 400,000 for 18 straight weeks, a sign the pace of layoffs is stabilizing, analysts said.

--many retailers, including Wal-Mart and Nordstrom, reported January sales above expectations. Frigid weather helped to boost sales of winter apparel and other cold-weather items and heavy discounting lured shoppers into stores.

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On the Net:

Productivity report: http://www.bls.gov/