Washington, DC, September 2--Productivity grew at a seasonally adjusted annual rate of 2.5% during the second quarter of 2004, the slowest pace in 18 months, the Labor Department said. The growth rate had previously been estimated at 2.9%.
Economists surveyed by Dow Jones Newswires and CNBC had called for a 2.7% growth rate in non-farm business productivity. The numbers suggested the long-predicted slowdown in productivity growth -- a key ingredient for a sustained job-market recovery -- is gradually materializing.
Productivity growth, in the long run, increases prosperity by allowing businesses to raise wages without heightening the danger of inflation. But in the last few years, it has mainly allowed employers to make do with fewer workers.
Since the summer of 2003, employers have replaced barely half of the 2.7 million non-farm jobs cut in the previous two-and-a-half years. Forecasters expect the government's jobs report for August, due Friday, to show an increase of no more than 150,000. That would be up from 32,000 in July but still barely enough to keep up with new entrants into the work force.
U.S. economists have predicted since 2001 that a slowdown in productivity growth was just round the corner. But the slowdown has occurred so gradually that it so far has failed to produce the "fairly significant pace" of job growth that Fed Chairman Alan Greenspan told Congress he expects in the near future. Fed policy makers, nevertheless, have indicated they intend to keep up the campaign of interest-rate increases they began in June.
"Barring a shock from terrorist attacks -- which may be the main risk we face -- we can anticipate with a very high degree of confidence that a good rate of [economic] growth will resume," William Poole, president of the Federal Reserve Bank of St. Louis, said in an interview with Dow Jones Newswires over the weekend. He said the Fed probably would continue raising interest rates even if job growth proves to have been disappointing in August.
Fed policy makers next meet on Sept. 21 to decide interest-rate policy. Since June, they've raised the key federal-funds rate twice, lifting it to 1.5% from 1%. Most economists agree that rate remains too low at a time when inflation is rising, however gradually. Wall Street expects the rate to climb to 1.75% on Sept. 21.
The Labor Department's report showed that the productivity slowdown in the second quarter partly reflected a downward revision to the government's previous estimate of economic growth. The U.S. gross domestic product grew at a seasonally adjusted annual rate of just 2.8% from April through June, down from the initial estimate of 3%.
Still, unit labor costs -- a sign of inflation -- grew at a slightly slower pace than previously thought. Those costs rose just 1.8% in the second quarter, down from the previous forecast of 1.9%. In year-on-year terms, however, unit labor costs actually declined, falling 0.3%. Hourly compensation declined 0.4% in the second quarter, adjusted for inflation.
Manufacturers of nondurable goods enjoyed the biggest productivity gains during the second quarter, the Labor Department said. Labor productivity among such companies increased 9.7%, up from a 1.2% gain in the first quarter. Overall, the manufacturing sector saw a productivity gain of 6.9%, up from 2.8% in the first quarter.
Productivity gains were less impressive in the non-financial corporate sector, which Mr. Greenspan has called a "more accurate" gauge of general productivity trends. The Labor Department said productivity in that sector rose 3.9% in the second quarter. That marked a slowdown from a 5.9% rate in the previous quarter.
