Productivity shoots up 8.6 percent

WASHINGTON -- Productivity, a key ingredient of the economy's long-term vitality, turned in its best performance in 19 years in the first quarter as hard-pressed companies produced more with fewer workers.

The Labor Department reported Tuesday that productivity -- the amount of output per hour of work -- soared at an 8.6 percent annual rate in the January-March period, following a strong 5.5 percent growth rate in the previous quarter.

But the improvement came at a price. Businesses, responding to the lingering effects of last year's recession, cut back on their payrolls.

That caused the total number of hours worked to fall at a rate of 1.9 percent. Output, however, rose at a solid 6.5 percent rate.

"Business have spent the last year restructuring and managing their work forces cautiously. It is paying off," said economist Joel Naroff of Naroff Economic Advisors.

"Companies managed to squeeze every last ounce of production out of their workers and it showed."

Long-time coming

The first-quarter productivity gain marked the best showing since a 9.9 percent growth rate registered in the second quarter of 1983.

The rise in productivity in the first quarter helped to push down unit labor costs, a gauge of inflation. Unit labor costs declined at an annual rate of 5.4 percent, the biggest drop since the second quarter of 1983. In the fourth quarter, unit labor costs fell at a rate of 3.1 percent.

The performance of unit labor costs in the first quarter also was better than analysts' expectations of a 3.5 percent rate of decline and suggests that inflation is a no-show even as the budding economic recovery unfolds.

In the long run, productivity gains are good for workers, for the economy and for companies, whose profits took a hit during the slump.

Gains in productivity allow companies to pay workers more without raising prices, which would eat up those wage gains, and permit the economy to grow faster without triggering inflation. If productivity falters, however, pressure for higher wages could force companies to raise prices, thus worsening inflation.

Because productivity tends to be strongest during early periods of the economy's recovery, the first-quarter spike wasn't unusual, economists pointed out. Nonetheless, it was welcome news.

"The surge ... is a powerful sign that the recovery is alive and well and that corporate earnings will end up being strong this year," said Merrill Lynch's chief economist Bruce Steinberg.

For the year ending March, productivity rose 4.3 percent, the biggest gain since the second quarter of 2000. Unit labor costs dipped by 0.9 percent.

In general, productivity tends to rise strongly when the economy is booming. But gains in productivity can become weak or productivity can fall when the economy slows or contracts. For all of 2001, productivity grew by 1.9 percent, a slowdown from the 3.3 percent gain posted in 2000, but still a respectable showing given the slump.

Federal Reserve Chairman Alan Greenspan and his colleagues remain bullish about the long-term prospects of productivity growth, even though businesses sharply cut investment in productivity-enhancing computers and other high-tech equipment during the recession. That was a key source of the economy's weakness.

"With the growth of productivity well maintained and inflation pressures largely absent, the foundation for economic expansion has been laid," Greenspan told Congress last month.

Separately, Americans, amid rising unemployment, borrowed a little less freely in March, the Federal Reserve said in a second report Tuesday.

Consumer credit rose by a seasonally adjusted $4.6 billion, or at a 3.3 percent rate. That marked a slowdown from a rise of $7.1 billion and a 5.1 percent rate in February.

Demand for nonrevolving credit, including new cars and vacations, rose at a rate of 3.8 percent in March, a moderation from February's brisk 7.7 percent rate. But revolving credit, such as that used for credit cards, increased at a rate of 2.6 percent, up from February's 1.4 percent pace.

The Fed's report on consumers includes credit card debt and loans for autos, boats and mobile homes. It does not include loans backed by real estate, such as home mortgages or increasingly popular home equity loans.

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On the Net:

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