Productivity Gains More Than Expected

US businesses cut back sharply on worker hours during the first three months of this year as the economy slowed, driving up productivity to a higher-than-expected 2.2 percent annual pace, a government report on Wednesday showed.

Gary C. Knapp / AP

Economists polled by Reuters were expecting nonfarm worker productivity, or hourly output per worker, to increase at a 1.5 percent annualized rate.

The Labor Department said worker hours fell at a 1.8 percent rate during the quarter, making it the biggest decline since the start of 2003 when the country was in the midst of a jobless recovery from its last economic downturn.

The aggressive efforts to cut back on hours worked in the quarter should help businesses shield their profits and keep wage-related price pressures under control.

Generally, weaker productivity amid tight labor markets can spell wage-driven inflation. But faster productivity growth may help the economy expand without sparking that wage push.

"If production is rising and employment falling then productivity has to rise. It is the only silver lining in what otherwise is a dark inflation cloud," said Tom Sowanick, chief investment officer at Clearbrook Financial in Princeton, NJ.

Unit labor costs, a gauge of inflation and profit pressures under close scrutiny by the Federal Reserve, rose at a 2.2 percent annual pace, slower than the 2.5 percent increases analysts were expecting.

Compensation per hour rose at a 4.4 percent annual rate, but adjusted for inflation, it rose a scant 0.1 percent.

Treasurys were flat to slightly weaker after stocks pared losses on the productivity news.

The U.S. dollar held gains against major currencies. The euro was last down 0.7 percent at $1.5418. The dollar was up 0.7 percent at 105.51 yen.

When compared to the first quarter of 2007, productivity was up 3.2 percent and unit labor costs rose a mere 0.2 percent.

Compensation rose 3.4 percent, but when adjusted for inflation it dropped 0.7 percent from 2007's first quarter.

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