Posted on: Thursday, September 6, 2001

Productivity grows 2.1 percent in second quarter

By Jeannine Aversa
Associated Press

WASHINGTON — Productivity, a key measure of living standards, rebounded in the second quarter as businesses slashed workers' hours by the largest amount in a decade.

The Labor Department reported yesterday that productivity — the amount of output per hour of work — rose at an annual rate of 2.1 percent in the April-June quarter, after a scant 0.1 percent advance in the first three months of this year.

While the new estimate of second-quarter productivity is lower than the 2.5 percent growth rate reported a month ago, economists still viewed it as a solid gain.

The second-quarter increase came even as the nation's economy grew at its weakest pace in eight years.

In general, productivity tends to rise strongly when the economy is booming, but gains in productivity can become very weak or fall when the economy slows as it did beginning in the second half of last year.

One of the main reasons productivity grew so much in the second quarter was because businesses, coping with the slowdown, cut workers' hours at a 2.6 percent rate, the biggest drop since the first quarter of 1991. Output fell at a rate of 0.5 percent, the first decline since the first quarter of 1993, when the country was emerging out of its last recession.

"Businesses had a glut of everything — inventories, skilled workers. In cutting hours, they were simply trying to get themselves above water profit-wise," said economist Clifford Waldman of Waldman Associates.

In response to sagging sales, businesses have laid off thousands of employees, with the manufacturing industry, hardest hit by the slump, cutting payrolls by more than 800,000 in the 12 months ending in July.

Economists were expecting a downward revision to productivity because the economy had grown far more slowly in the second quarter than the government had initially thought. Last week, the government reported a 0.2 percent growth rate, versus the 0.7 percent growth rate originally reported.

Gains in productivity are the key to rising living standards because they allow wages to increase without triggering the inflation that would eat up those wage gains. If productivity falters, however, pressures for higher wages could force companies to raise prices, thus worsening inflation.

The lower productivity estimate resulted in unit labor costs being revised upward. Unit labor costs, a gauge of inflation pressures, rose at a 2.7 percent rate in the second quarter.

That's higher than the 2.1 percent rate previously reported, but was a moderation from a 5.0 percent rate in the first quarter. Even with the upward revision, unit labor costs in the second quarter posted their smallest increase in a year.

Over the 12 months ending June, productivity grew by 1.5 percent, the smallest gain since the fourth quarter of 1995, but still considered respectable by economists, given the weak economy. Unit labor costs rose 4.9 percent.

Federal Reserve Chairman Alan Greenspan has said he remains bullish about the long-term prospects of productivity growth, even though businesses, responding to the slowdown, have pared back investment in computers and other productivity-enhancing equipment.

From 1973 to 1995, productivity averaged lackluster gains of just above 1 percent per year. But since 1995, increases have more than doubled. Productivity growth averaged 2.5 percent from 1996 to 2000.

Yesterday's figures "clearly do seem to indicate that the economy has raised the bar on a sustained basis on higher productivity growth," said Tim O'Neill, chief economist at the Bank of Montreal and Harris Bank.

"It is not quite to the level that New Economy enthusiasts were anticipating or promoting, but it is an improvement over what economy has seen from the mid-1980s to early '90s," he added.

Still, economists continue to debate whether the healthy productivity gains seen after 1995 represent a "new economy," meaning a lasting, structural change, driven in large part by businesses making massive investments in high-tech equipment. Conversely, they question whether the gains were simply the fruit of economic boom times in which companies pushed workers more to meet rapidly rising demand.