Productivity Surges, New Jobless Claims Up as Well

WASHINGTON – The productivity of U.S. companies in the second quarter posted the biggest gain in more than a year as businesses produced more with fewer workers. New claims for unemployment benefits climbed last week to the highest level since the middle of July.

The pair of reports released Thursday by the Labor Department (search) underscored some of the strains facing U.S. workers even as the economy shows signs of gaining momentum.

Productivity — the amount an employee produces for each hour of work — soared at an annual rate of 6.8 percent in the April-to-June quarter, even stronger than the government's first estimate of a 5.7 percent growth rate. The revised reading was better than the 6.4 percent growth rate economists were predicting and marked the largest increase since the first quarter of 2002.

In the second report, the department said new applications for jobless benefits jumped by a seasonally adjusted 15,000 to 413,000 for the work week ending Aug. 30.

The rise propelled claims to their highest point since the week ending July 12 and pushed them above 400,000, a level associated with a weak job market. In the prior two weeks, claims managed to move below that threshold, raising hopes among economists that the pace of layoffs was slowing.

Although recent economic reports have displayed signs that the economy is rebounding, businesses still remain cautious, especially when it comes to hiring workers, economists said. They want profits to improve and they want to feel more confident about the vigor of the rebound before they go on a hiring spree, analysts say.

Economists expect the nation's unemployment rate to stay stuck at 6.2 percent when the government releases the employment report for August on Friday. Economists say that the battered job market will be one of the last areas of the economy to recover.

Even so, with other parts of the economy on the mend, economists believe the Federal Reserve (search) probably will hold a key short-term interest rate steady at a 45-year low of 1 percent when its meets on Sept. 16. Low short-term rates, along with President Bush's third tax cut, should induce consumers and businesses to step up spending and investment, thus boosting economic growth, analysts say.

The 6.8 percent productivity growth rate registered in the second quarter was three times faster than the 2.1 percent growth rate posted in the first quarter, which from an economic perspective is good news.

For the economy's long-term health and rising living standards, solid productivity gains are crucial. They allow the economy to grow faster without triggering inflation. Companies can pay workers more without raising prices, which would eat up those wage gains. And, productivity can bolster a company's profitability.

One recent consequence of improving productivity, however, has been an ability of many businesses to pare existing work forces and still meet increases in demand, says Federal Reserve Chairman Alan Greenspan.

In the second quarter, businesses produced more with fewer employees, leading to a decline in hours worked.

Businesses boosted output at a brisk 4.4 percent rate in the second quarter, up from a 1.4 percent growth rate in the first quarter. But workers' hours were cut at a 2.3 percent rate in the second quarter, following a 0.7 percent rate of decline in the prior three months.

People who kept their jobs, however, made gains. Workers' hourly compensation, adjusted for inflation, rose at a 3.2 percent rate in the second quarter, up from a 0.2 percent growth rate in the first quarter.

Companies' unit labor costs, meanwhile, fell at a rate of 2.8 percent in the second quarter, boding well for profit margins. That compared with a 2 percent growth rate in the first quarter.