Washington, DC, February 2, 2006--Productivity of the American workplace fell at an annualized rate of 0.6% in the fourth quarter, the first decline since the first quarter of 2001, the Labor Department estimated Friday.
Unit labor costs -- a key gauge of inflationary pressures -- rose 3.5% annualized, the most in a year.
The quarterly productivity number was much worse than the 1.2% gain expected by economists surveyed by MarketWatch. See Economic Calendar.
The weak productivity report could add to pressures on the Federal Reserve to raise interest rates to keep inflation at bay. The Fed is expected to raise rates one or two more times. See our complete Fed coverage.
In the third quarter, productivity was revised to a 4.5% increase from 4.7% previously. Third-quarter unit labor costs fell 0.5%, rather than the 1% decline originally reported. Read the full report.
For all of 2005, productivity increased 2.7%, the smallest increase since 2001. Annual productivity has been more than 2% in nine of the past 10 years after nearly two decades of gains averaging less than 2%.
Unit labor cost rose 2.4% in 2005, the fifth year in a row that productivity gains have outpaced unit labor costs.
Productivity, defined as output per hour worked, is perhaps the most important long-term variable in economics.
Higher productivity can mean higher profits, wages and living standards. Productivity can keep inflationary pressures at bay. But the concept is difficult to measure, especially in financial services where the concept of a "unit" of output is murky.
The data can vary widely from quarter to quarter, so economists prefer to look at longer trends.
In the fourth quarter, output in the nonfarm business sector increased 0.9%, the smallest increase in three years. Hours worked rose 1.5%.
Unit labor costs - the cost of the labor used to make one "unit" of output -- increased 3.5%, a stiff warning that inflationary pressures could be rising.
However, real hourly compensation (adjusted for inflation) fell 0.4% in the quarter. For 2005, real hourly compensation rose 1.8%, the fifth straight year below 2%.
Unit labor costs are up just 1% year-on-year, the slowest growth in six quarters.
In the manufacturing sector, productivity increased 3.9% in the fourth quarter, with unit labor costs falling 1.9%. Output in manufacturing rose 8.4%, the most in eight years.
