Productivity Falls 1.2%, Much Worse Than Expected

American workers' productivity, a key measure of rising living standards, recorded its biggest drop in eight years, falling at an annual rate of 1.2 percent in the first quarter.

The number is far weaker than what the government and experts had expected.

The downward revision in productivity — the amount of output per hour of work — released by the Labor Department Tuesday reflected the weakened state of the U.S. economy. The government had previously estimated that productivity in the January-March quarter dipped at a rate of 0.1 percent.

The 1.2 percent decline, bigger than analysts predicted, was the largest since the first quarter of 1993, when productivity fell at a rate of 5 percent.

The productivity drop boosted unit labor costs, a gauge of inflation pressures, at an annual rate of 6.3 percent in the first quarter, the biggest increase since the fourth quarter of 1990 and faster than many analysts expected, according to revised figures.

The increase in labor costs was greater than the government's earlier estimate that they rose at a 5.2 percent annual pace in the January to March period, and marked the largest gain since a 6.8 percent advance in the last three months of 1990.

The lower productivity figure is a byproduct of a slowing economy, which grew at an annual rate of 1.3 percent in the first quarter, far more slowly than the 2 percent rate the government previously estimated.

The report highlights a conundrum facing the Federal Reserve at its next interest-rate setting meeting at the end of this month. While the slump in productivity argues for further aggressive cuts in interest rates to foster economic growth, the potential for inflation implied by rising labor costs argues for a more cautious approach.

Productivity, measuring the amount of goods and services workers produce per hour, is crucial to rising living standards but has fallen steadily in recent quarters.

When workers' productivity grows, companies can produce more while holding down costs. The first-quarter decline in productivity was the steepest falloff since a 5.0 percent slump during the first three months of 1993.

``Productivity has been one of the centerpieces of the whole New Economy gains that we saw over the last couple of years with respect to being able to have strong growth and low inflation, so the drop in productivity deepens ... anxiety that the strong growth-low inflation scenario won't be as dominant a trend as it has been in recent years,'' said Kim Rupert, senior economist at Standard & Poor's MMS.

But many economists believe the productivity downturn is just a cyclical dip that will reverse as soon as economic growth picks up. Still, they find the surge in unit labor costs troubling.

``There is some concern,'' said Michael Swanson, senior economist at Wells Fargo bank in Minneapolis. ``You just can't see that kind of wage increases without productivity and not see it reflected in the price of goods and services later on.''

The numbers were broadly in line with Wall Street expectations. Economists polled by Reuters had forecast productivity would fall by 0.8 percent and unit labor costs would rise by 6 percent in the first three months of the year.

-- Reuters and the Associated Press contributed to this report.