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Productivity Rises 1%, But Labor Costs Exceed Forecasts

U.S. worker productivity grew at a slower pace than initially estimated during the first three months of this year as the economy just inched ahead, driving up labor costs and backing Federal Reserve sentiments that inflation is indeed a concern.

The Labor Department reported Wednesday that non-farm productivity, a measure of how much any given worker can produce in an hour, advanced at a 1.0 percent annualized pace during the first quarter of this year, driving up unit labor costs by 1.8 percent.

Economists polled ahead of the Labor Department report had revised down their forecasts for productivity, expecting non-farm productivity to advance by 1.1 percent and unit labor costs to rise by a bigger 1.2 percent after the government reported scant gross domestic product growth of just 0.6 percent during the first quarter.

"It indicates growth was not so great in the first quarter and that went straight into productivity," said Nigel Gault, chief U.S. economist at Global Insight in Waltham, Massachusetts.

"As far as the Fed is concerned, they are not going to be surprised, but this reminds them that wage pressure is still the number one inflation risk, at least domestically," he added.

U.S. Treasury debt prices were little changed after the report and stock index futures extended losses, while the dollar was mostly steady.

The Labor Department's earlier estimate for first-quarter productivity showed it rising at a seasonally adjusted annual rate of 1.7 percent and unit labor costs increasing 0.6 percent.

In Wednesday's report, hourly compensation rose by 2.8 percent in the first quarter, up from the prior quarterly estimate of 2.3 percent.

Planned Job Cuts Rose In May

On the labor front, U.S. employers announced plans in May to eliminate 71,115 jobs, up 32 percent from May 2006 when job cuts totaled 53,716.

It was the second consecutive month in which job cuts increased from the same period a year ago, according to the monthly job-cut report released Wednesday by global outplacement consultancy Challenger, Gray & Christmas, Inc.

Still, year to date, the pace of job cutting remains below last year's level, but the gap is rapidly closing.

Heavy downsizing in the computer industry dominated May job cuts.

"Heavy job cutting in the computer industry reflects a slowdown in business spending on new technology. We may continue to see heavy cuts in the months ahead with spending expected to remain soft in the near future," said John A. Challenger, chief executive officer at the Chicago-based firm.

A separate report showed rising mortgage rates dampened demand for home loans last week, with an increase in applications for loans to purchase homes overshadowed by a drop in refinancings.

The Mortgage Bankers Association's mortgage application index slipped 1.7 percent to a seasonally adjusted 625.3 in the week ended June 1 as long-term interest rates hit their highest level since October.

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