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Productivity Slows Less Than Expected as Labor Costs Rise

U.S. productivity slowed in the the spring, while labor costs rose for the second straight quarter, though both figures came in lower than expected, according to dual reports released Tuesday by the Bureau of Labor Statistics.

AP

Productivity fell at an annual rate of 0.3 percent in the April to June period, slowing from the 0.6 percent decrease logged in the first three months of the year. The first-quarter figure was revised down sharply from the originally reported 1.8 percent increase, according to the Bureau of Labor Statistics.

Economists surveyed by FactSet had expected productivity in the second quarter to decline at a rate of 0.8 percent.

Labor costs, meanwhile, rose 2.2 percent, the second straight increase, though slightly lower than expectations of a 2.5 percent rise.

First-quarter labor costs were revised to show an increase of 4.8 percent, up sharply from the previous estimate of a 2.2 percent increase.

Productivity measures the amount of output per hour worked. Higher productivity is generally a good thing, because it can raise standards of living by enabling companies to pay workers more without raising their prices and increasing inflation.

However, productivity gains can be painful in the short run if they are often a result of job cuts. Productivity tends to rise sharply as companies lay off workers, who need to figure out how to do more with less.

But companies are running out of ways to squeeze more work out of existing staffs, causing productivity to drop.

Some economists are concerned that the falling productivity figures suggest companies hired too many workers earlier this year, on the assumption that growth was picking up. Instead, recent government data show the economy is much weaker than many analysts realized.

Growth slowed to a 0.8 percent annual rate in the first six months of the year, the government said late last month, the weakest pace since the recession ended two years ago. The economy expanded at a scant 0.4 percent rate in the January-March period, far lower than an earlier estimate of 1.9 percent.

Consumers have cut back on spending in the face of stagnant wages, high unemployment and high gas prices. Supply disruptions stemming from Japan's March 11 earthquake also reduced output, primarily in the auto sector.

In response, employers slammed the brakes on hiring, adding an average of only 72,000 jobs per month in the May-July period. That's far fewer than the average of 215,000 per month in February-April.

Still, the impact of that hiring spree in the February-April period, coming at a time of slowing economic growth, may have been to reduce productivity.

Meanwhile, rampant anxiety about the slowing U.S. economy, along with concerns about the European debt crisis and the first-ever downgrade of U.S. debt, has caused the stock market to plummet by about 15 percent in the past two and a half weeks.

The Dow Jones Industrial Average plunged more than 600 points on Monday, the first trading day after Standard & Poor's downgraded long-term U.S. debt to AA+ from triple A.

The Federal Reservewatches productivity and unit labor costs carefully. Since increases in productivity allow companies to pay workers more without raising the prices of their products, productivity gains can help keep inflation at bay.

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