First Quarter Productivity Rises More Than Expected

U.S. nonfarm productivity rose at a faster-than-expected 3.2 percent annual rate in the first quarter while unit labor costs were nearly double forecasts as hourly compensation surged, preliminary Labor Department data showed on Thursday.

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Wall Street analysts polled by Reuters had expected productivity to climb at a rate of 3.0 percent, after gross domestic product growth accelerated sharply at the start of the year. Fourth-quarter productivity was revised slightly higher to show a 0.3 percent annualized decline compared with the 0.5 percent dip previously reported.

"Because hourly compensation increased faster than productivity, unit labor costs increased during the first quarter," the Labor Department said in a statement.

Unit labor costs -- a key gauge of profit and price pressures monitored by the Federal Reserve for clues on wage inflation - increased at a 2.5 percent annual pace.

Wall Street had been looking for a slower 1.3 percent advance after costs jumped 3.0 percent in the previous quarter. This was revised down slightly from a previously reported 3.3 percent gain. Unit labor costs measure the cost of labor associated with any given unit of production.

Hourly compensation increased at a 5.7 percent annualized pace in the opening three months of 2006, compared with a revised 2.7 percent rate in the previous quarter, the Labor Department said. This was previously reported as a 2.8 percent rise.

Productivity gains tend to slow as an economic upswing matures and employers struggle to wring additional output from existing workers and equipment, prompting them to hire and invest. Slowing productivity can also pressure labor costs.

However, U.S. factories proved they can keep squeezing efficiencies from their workforce. Manufacturing productivity rose at a 4.2 percent pace in the first quarter of the year, after rising 4.7 percent in the previous three months.

But bucking the broader nonfarm business sector trend, manufacturing unit labor costs actually declined, at a 2.6 percent annualized pace, after dropping at a 3.3 percent rate in the fourth quarter of last year, while compensation per hour advanced at the tepid rate of 1.5 percent.

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