Productivity Growth Slows in Fourth Quarter; Labor Costs Surge

U.S. business productivity growth was revised down sharply as expected in the fourth quarter to an annualized 1.6 percent pace, government data on Tuesday showed, in a warning on inflation as labor costs soared.

The slowdown in nonfarm business productivity, a measure of how much any given worker can produce in an hour, matched a forecast of analysts polled by Reuters and compared with the previously estimated 3.0 percent gain.

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Productivity for 2006 as a whole advanced by 1.6 percent, its weakest increase since a matching pace set in 1997, the Labor Department said.

The slippage in productivity sent unit labor costs up at a thumping 6.6 percent annualized rate in the fourth quarter. Unit labor costs are a gauge of inflation and profit pressures that are watched closely by the U.S. central bank.

Analysts expected unit labor costs to be revised up to an annualized 3.2 percent gain in the fourth quarter, from 1.7 percent previously reported. For the year as a whole, unit labor costs rose 3.2 percent, the largest gain since 2000, when they were up 4.2 percent.

Federal Reserve officials worry slowing productivity could push up wage inflation amid tight labor markets. But they also have said that the decline will probably prove to be a temporary, cyclical phenomenon, and do not see it as a warning that America is losing its competitive edge.

In addition, analysts had anticipated productivity would be revised down after fourth-quarter economic growth was trimmed back, while U.S. employment stayed strong.

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