Q2 Productivity Slower Than Expected

U.S. business productivity grew at a slower-than-expected 1.8 percent annual rate in the second quarter, a government report showed on Wednesday, while compensation gains caused unit labor costs to rise more quickly than first thought.

Wall Street (search) analysts had expected non-farm business productivity, or worker output per hour, to be revised down to a 2.0 percent pace from the 2.2 percent clip initially reported, a slowdown from the first quarter's 3.2 percent growth.

In fact, second-quarter output (search) was revised down while hours worked were revised higher.

At the moment, the U.S. central bank is more likely to be preoccupied by the impact on inflation of soaring gasoline prices after Hurricane Katrina (search).

But productivity gains affect how companies absorb rising costs such as energy, and slowing productivity may mean these could take a bigger bite out of corporate profits. Alternatively, if firms succeed in passing on higher costs to customers, it could have implications for inflation that the U.S. central bank will monitor.

The Fed said last month it expects to maintain the measured pace of its more than year-long campaign of steady quarter-percentage-point interest rate hikes. But since Katrina, markets have bet it will pause after the next hike at 3.75 percent.

Hours worked grew at a 2.2 percent annual rate in the second quarter, the fastest pace of growth since the third quarter of 2004, as firms ran operations for longer.

Productivity growth was also substantially slower compared with a year ago when it grew at a 4.5 percent rate. But this is not necessarily bad news since it reflects cyclical changes in company hiring and a welcome boost to job creation.

Officials had predicted productivity would moderate as companies exhaust ways of boosting output by making existing workers more efficient and instead lifted hiring. During the second quarter some 571,000 new U.S. jobs were created.