Productivity Notches Best Performance in Almost 19 Years

Worker productivity, a key ingredient to the economy's long-term vitality, shot up at an annual rate of 8.6 percent in the first quarter, the best performance in nearly 19 years.

The jump in productivity -- the amount of output per hour of work -- followed a strong 5.5 percent rate of increase in the final three months of 2001, the Labor Department reported Tuesday.

Productivity performance in the January-March quarter was better than many analysts expected. They were forecasting a 7 percent growth rate.

But the improvement came at a price. Businesses, responding to the lingering effects of last year's recession, cut back on their payrolls. That caused the total number of hours worked to fall at a rate of 1.9 percent. Output, however, rose at a solid 6.5 percent rate.

The first-quarter productivity gain marked the best showing since a 9.9 percent growth rate registered in the second quarter of 1983.

The rise in productivity in the first quarter helped to push down unit labor costs, a gauge of inflation. Unit labor costs declined at an annual rate of 5.4 percent, the biggest drop since the second quarter of 1983. In the fourth quarter, unit labor costs fell at a rate of 3.1 percent.

The performance of unit labor costs in the first quarter also was better than analysts' expectations of a 3.5 percent rate of decline and suggests that inflation is a no-show even as the budding economic recovery unfolds.

In general, productivity tends to rise strongly when the economy is booming. Gains in productivity can become weak or productivity can fall when the economy slows or contracts.

In the long run, productivity gains are good for workers, for the economy and for companies, whose profits took a hit during the slump.

Gains in productivity allow companies to pay workers more without raising prices, which would eat up those wage gains, and permit the economy to grow faster without triggering inflation. If productivity falters, however, pressure for higher wages could force companies to raise prices, thus worsening inflation.

For the year ending March, productivity rose 4.3 percent, the biggest gain since the second quarter of 2000. Unit labor costs dipped by 0.9 percent.

Federal Reserve Chairman Alan Greenspan and his colleagues remain bullish about the long-term prospects of productivity growth, even though businesess sharply cut investment in productivity-enhancing computers and other high-tech equipment during the recession. That was a key source of the economy's weakness.

"With the growth of productivity well maintained and inflation pressures largely absent, the foundation for economic expansion has been laid," Greenspan told Congress last month.

Last year's recession, which ended a 10-year economic expansion, the longest such period in U.S. history, has been determined to have begun in March 2001. The National Bureau of Economic research has yet to rule when the recession ended but many economists say the committee probably will eventually select January or February.