Productivity Declines for First Time in Five Years

U.S. nonfarm business productivity unexpectedly fell in the fourth quarter at a 0.6 percent annual rate, the first decline in nearly five years, while labor costs accelerated sharply, a government report showed on Thursday.

Wall Street had expected a slowdown in productivity growth in the final three months of 2005 to a 1.6 percent rate, and the outright decline is likely to boost inflation fears. It was the first decrease in productivity since the first quarter of 2001.

Third-quarter productivity growth was also revised lower, to a 4.5 percent clip from the previously reported 4.7 percent increase.

The drop in productivity pushed unit labor costs - a key gauge of profit and price pressure - up at a 3.5 percent annual rate, the fastest growth since the fourth quarter of 2004.

Economists had expected a milder 2.3 percent increase in unit labor costs, and the sharp acceleration in costs suggests inflation pressures are hitting the labor market. The third-quarter's decline in labor costs was also revised to show a 0.5 percent drop, rather than the previously reported 1.0 percent fall.

For 2005, growth in business productivity rose at a 2.7 percent annual rate, down from 3.4 percent growth in 2004 and the slowest increase since 2001.

Unit labor costs were up 2.4 percent in 2005, more than double 2004's 1.1 percent gain and the largest annual increase since a 4.2 percent gain in 2000.