Productivity up in 4Q as labor costs drop

Posted on March 3, 2011

(AP) Productivity grew in the final quarter of 2010 at the fastest pace in nine months but economists expect a significant slowdown in the growth rate in 2011.

Productivity grew at an annual rate of 2.6% in the fourth quarter while labor costs were falling at an annual rate of 0.6%, the Labor Department said today. Both figures were unchanged from a preliminary report a month ago.

For the year, productivity grew 3.9%, the biggest increase in eight years.

However, economists say productivity could grow at just half that rate in 2011 as companies reach the limit on the amount of output they can squeeze out of their existing workforces and start hiring more employees.

A survey of top forecasters from the National Association forBusiness Economics this week predicted that productivity would advance 2.1% this year and 1.9% in 2012. While those gains would be in line with the growth trend over the past three decades, it would represent a significant slowdown after a surge over the past two years.

The 3.9% jump in productivity in 2010 followed a 3.7% rise in 2009. Both figures were the highest since productivity rose 4.6% in 2002, the largest increase in a half century.

Normally, a slowdown in productivity would be considered bad for the economy. But the two-year surge came at the expense of many workers. Companies shed 8 million jobs during the recession and the economy now needs job growth now, even at the expense of worker productivity, economists say.

The 2.6% rise in productivity in the fourth quarter was the best quarterly showing since an increase of 4.6% in the first three months of 2010.

The 0.6% drop in unit labor costs was the first quarterly decline since labor costs fell at a 4.6% rate in the first three months of 2010. For the year, unit labor costs declined 1.5% after having fallen 1.6% in 2009.

The Federal Reserve watches productivity carefully because productivity increases allow companies to pay workers more without being forced to boost the price of their products, which can cause inflation.

However, with inflation pressures, outside of energy and food remaining low, the Fed’s main worry currently is getting the unemployment rate down.