Worker Productivity Slows in 1Q; Wage Pressures Ease

WASHINGTON – The productivity of American workers slowed sharply in the first three months of this year but wage pressures eased as well, providing evidence that inflation is being restrained.

The Labor Department reported that the amount of output per hour of work for nonfarm businesses rose at annual rate of 1 percent in the January-March quarter. That was the slowest advance since the third quarter of last year and was below the government's initial estimate that productivity rose at a 1.7 percent rate in the first quarter.

Labor costs rose at an annual rate of 1.8 percent. That was up from an initial estimate of 0.6 percent growth in unit labor costs but was still lower than the 8.9 percent surge reported in the final three months of last year.

While higher wages are good for workers, increases that outstrip the growth of productivity can trigger unwanted inflation as employers are forced to boost the cost of their products to meet their higher payroll costs.

Rising productivity means that employers can boost salaries because of workers' increased efficiency. It is the single most important factor supporting rising living standards.

The revision to productivity in the first quarter reflected the sharp downward revision to overall economic growth, which got slashed to 0.6 percent from an initial estimate of 1.3 percent.

The latest reading on unit labor costs should ease concerns at the Federal Reserve about wage pressures.

The Fed pushed interest rates higher for two years in an effort to slow the economy and keep inflation under control. The central bank has not raised rates in a year and many analysts believe Fed officials will remain on the sidelines for the rest of this year, watching to see if they have done enough to produce an economic soft-landing.

Despite the weak start to the year, recent indicators have bolstered the view that the economy began to rebound in the spring, despite lingering problems in housing.

In a new economic forecast, the National Association of Realtors on Wednesday predicted that sales of existing homes will fall by 4.18 percent this year, lowering a previous forecast which had called for a 2.9 percent decline this year.

"Home sales will probably fluctuate in a narrow range in the short run, but gradually trend upward with improving activity by the end of the year," said Lawrence Yun, the Realtors' chief economist.

He predicted that sales, which had set records for five straight years before falling in 2006, will resume rising in 2008, increasing by a projected 3.7 percent.

Meanwhile, the Bush administration released an updated economic forecast for 2007, predicting that the economy will grow by 2.3 percent this year, when measured from the fourth quarter of last year. That is down from a forecast of 2.9 percent the administration made six months ago. Officials said the lower figure reflected the much slower growth that occurred in the first three months of this year.

Fed Chairman Ben Bernanke said in a speech Tuesday that he believed the economy would strengthen as the year progresses, comments that were read by Wall Street as lessening the chances for a rate cut to boost a lagging economy.

The 1 percent rise in productivity in the January-March quarter was below the 1.6 percent average growth rate of last year and that figure has been a drop from the 2.1 percent increase in 2005.

Analysts are watching productivity carefully to see whether a rebound in efficiency starting in the mid-1990s was a temporary spurt or the start of a longer-range trend.