U.S. economy has best growth rate for productivity in 19 years

WASHINGTON -- A crucial ingredient in the economy's long-term vitality, productivity, turned in its best performance in almost two decades during the first quarter of the year as hard-pressed companies produced more with fewer workers.

Productivity -- the amount of output per hour of work -- soared at an annual rate of 8.4 percent in the January-March quarter, after a strong 5.5 percent growth rate in the previous quarter, the Labor Department reported Friday.

The latest figures show that last year's recession didn't derail healthy productivity gains seen in the late 1990s and bodes well for keeping the nation's economic recovery on solid footing, economists said.

In another encouraging report for the recovery, orders to U.S. factories rose 1.2 percent in April, the biggest gain in six months, the Commerce Department said. That reflected stronger demand for a wide variety of goods, including cars, household appliances and machinery.

"This is all positive news. It should give skeptics some evidence that the economic recovery in the United States is in fact going to have staying power," said Lynn Reaser, chief economist at Banc of America Capital Management.

On Wall Street, investors were heartened by the economic news, but worries over global conflicts limited gains. The Dow Jones industrial average, having gained as much as 130 points earlier in the session, closed up 13.56 points at 9,925.25.

8.4 percent rise

The 8.4 percent rise in productivity in the first quarter marked the biggest increase since the second quarter of 1983 and matched many analysts' expectations.

Economists predicted the new reading on first-quarter productivity would be slightly lower than the 8.6 percent rate initially estimated because the economy grew a little less briskly during the period than previously thought.

The impressive productivity gain came at a price. Businesses, responding to the lingering effects of last year's recession, cut back on their payrolls in the first quarter. That caused the total number of hours worked to fall at a rate of 2.1 percent. Output rose at 6.1 percent.

"As far as downsides go, this is roughly the equivalent of eating your broccoli. It may be tough to stomach at first, but it makes you stronger and healthier in the long run," said Mark Vitner, economist at Wachovia Securities.

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. Productivity gains also permit the economy to grow faster without triggering price inflation. If productivity falters, however, pressure for higher wages could force companies to raise prices and thus worsen inflation.

Labor costs fall

The rise in productivity helped to push down unit labor costs, a gauge of inflation. Unit labor costs dropped at an annual rate of 5.2 percent in the first quarter, after a 3.1 percent rate of decline in the previous quarter. That also bodes well for improving companies' profits margins, economists said.

"The surge in productivity growth 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 economist Gerald Cohen.

Productivity normally 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.