Worker productivity surging amid cutbacks

By Barbara Hagenbaugh
USA Today

U.S. worker productivity grew strongly in the final three months of 2001 as businesses slashed workers' hours at the fastest pace in more than a decade but managed to keep output levels high, the government said yesterday.

The report bodes well for corporate profits as the economy climbs out of a recession, analysts say. But it is not good news in the near term for those who are out of work, because it shows that firms can squeeze output from their current pared-down work forces without causing big production drops. So why hire?

"This is better news for companies and better news for the economy overall than it is for the workers," says Mark Vitner, an economist at Wachovia Securities in Charlotte, N.C. "Companies are going to continue to be very cautious in hiring additional workers this year."

Productivity, or worker output per hour, excluding farming, climbed at a 3.5 percent annual rate in the fourth quarter, its strongest increase in a year and a half, the Labor Department says. Productivity rose 1.1 percent in the third quarter.

Output, meanwhile, fell a slim 0.4 percent in the fourth quarter after sinking 2.3 percent in the third quarter. Hours worked plummeted 3.7 percent last quarter, its biggest decline since the first quarter of 1991 when the economy was last in a recession.

"It demonstrates that the business sector is aggressively managing its operations during this recession," says Frederick Breimyer, chief economist at State Street in Boston. "They did not wait to act. They acted quickly ... to trim their work force, trim hours and to produce."

Productivity usually falls during economic downturns, but firms have been aggressive in cutting hours during this recession, which began in March.

With productivity growth strong, firms will be able to ramp up production with little added expense once sluggish demand recovers.

"There is a silver lining for profits," says Stuart Hoffman, chief economist at PNC Financial Services Group in Pittsburgh. "When the recovery does come more noticeably, businesses might be able to take advantage (of productivity growth)."