Washington, Feb. 6 (Bloomberg) -- U.S. productivity unexpectedly dropped in the fourth quarter for the first time since the second quarter of 2001 as a cooling economy caused companies to curb production. The measure of how much an employee produces for every hour worked declined at a 0.2 percent annual pace from October through December, the Labor Department said. That compared with a third- quarter increase of 5.5 percent as economic growth surged. It was the first decrease since a 0.1 percent drop from April through June in 2001, when the economy was in recession. ``Productivity had been running at unusually high levels, and it's hard to keep growing that fast.'' said Cynthia Latta, an economist at DRI-WEFA Global Insight in Lexington, Massachusetts. ``There's got to be a payback at some point.''
For all of 2002, productivity was still up 4.7 percent, the most since 1950. That's almost twice the 2.5 percent average from 1996 to 2000 as investments in computers and other technology boosted efficiency. From 1976 to 1995, productivity expanded at an average of 1.4 percent. ``Even with the (fourth-quarter) decline, I don't think there's any reason to doubt that the trend in productivity is better than it used to be,'' said Tim McGee, chief economist at U.S. Trust Corp., a unit of Charles Schwab Corp.
Rise Expected
Economists had expected a 0.7 percent rate of increase in productivity after the third quarter's previously reported 5.1 percent rise, based on the median of 63 forecasts in a Bloomberg News survey. The estimates ranged from a decrease of 1.0 percent to a gain of 1.8 percent. The 2002 increase suggests that companies are still benefiting from new technology and the economy needs to expand at a faster rate before hiring will accelerate. Unit labor costs, or the amount paid to a worker for each unit of production, rose at a 4.8 percent rate in the fourth quarter after a 0.1 percent rate of decline in the third quarter. It was the largest gain since an 8 percent rise in the 2000 third quarter. For all of 2002, unit labor costs fell 1.8 percent, the largest decline on record. ``Labor compensation has accelerated in the past few quarters, reflecting pressure from health-insurance premiums, and productivity will be able to provide only a modest offset in the most recent quarter,'' said Michael Moran, chief economist at Daiwa Securities America in New York, before the report.
Higher Health Costs
Economic growth in the final three months last year slowed to a 0.7 percent annual rate from 4 percent in the previous three months. Economists in the survey had expected a 3 percent rise in unit labor costs, following an initially reported decline of 0.2 percent. Rising productivity reduces the cost of doing business and enables the economy to grow faster than once though possible without triggering an outbreak of inflation. During the boom years of the late 1990s, productivity gains meant falling unemployment. The jobless rate headed toward a 30-year low of 3.9 percent in October 2000 and profits surged. When growth slowed starting in mid-2000, workers began to experience the dark side of higher productivity. As companies took advantage of computers to operate more efficiently, managers found that they could meet existing demand without adding to payrolls.
Profit Boosts
The trend was evident as recently as the fourth quarter. The Labor Department report showed that hours worked increased at a 1 percent annual rate, the first gain since the first quarter of 2001. At the same time, output slowed to a 0.8 percent rate of increase in the fourth quarter from a 5.2 percent pace in the third quarter. Manufacturing productivity posted gains. Productivity at the nation's factories rose at a 0.7 percent rate in the fourth quarter after increasing at a 5.5 percent rate in the third quarter. Such gains have helped boost profits. Sprint Corp., the third- biggest U.S. long-distance telephone company, yesterday said it posted $39 million in fourth-quarter net income because it pared costs. In the year-earlier quarter, Sprint had a $1.23 billion loss.
Federal Reserve Policy
The company has shaved expenses by cutting 15,000 jobs over the past two years. In December, Sprint said it would eliminate 2,100 positions by combining parts of its long-distance, Internet and wireless units to save $145 million a year. Federal Reserve policy makers have been citing productivity gains as a reason for little inflationary pressure, which has left the central bank the leeway to hold its benchmark overnight bank lending rate at 1.25 percent, the lowest since July 1961. Alfred Broaddus, the president of the Federal Reserve Bank of Richmond, who is a voting member of the Fed's Open Market Committee, said earlier this month that the economy may enjoy a ``modest'' increase in business spending as profits recover and as rising productivity induces companies to buy new equipment and software. //www.quote.bloomberg.com