Productivity, jobless claims drop unexpectedly

02/02/2006

WASHINGTON (Reuters) - U.S. business productivity fell unexpectedly in the fourth quarter and labor costs accelerated sharply in what could be an early sign of wage inflation, a government report showed on Thursday.

The Labor Department said nonfarm business productivity fell at a 0.6 percent annual rate in the fourth quarter, marking the first decline since the first quarter of 2001. That pushed unit labor costs up at a 3.5 percent pace—the fastest growth in a year and well above market expectations.

“With energy costs sky-high and compensation increasing, it is going to be very tough to keep inflation from accelerating this year,” said Joel Naroff, chief economist at Naroff Economic Advisors. “So if you were wondering why the Fed keeps raising rates, wonder no more.”

Wall Street had expected a fourth-quarter slowdown in productivity growth to a 1.6 percent rate, and the outright decline raised fears of more interest-rate increases, sending stock markets lower. The Dow Jones industrial average and the Standard & Poor’s 500 Index were down about 1 percent, while the Nasdaq Composite Index was down 1.3 percent shortly before noon.

Treasuries debt prices fell initially but later stabilized to be nearly unchanged, while the dollar fell against the euro and pared gains against the yen after U.S. intelligence chief John Negroponte said al Qaeda is still preparing for attacks on the United States.

Strong productivity growth in recent years had allowed employers to keep costs low even as output increased. An end to that growth suggests businesses have squeezed as much efficiency out of their workforce as possible, and are having to hire new employees and boost spending to keep up.

But some analysts said the surprise drop in productivity was partly because of distortions from the hurricanes that smashed into the U.S. Gulf coast in late summer, cutting production.

“This could be a temporary blip,” said Patrick Fearon, senior economist at A.G. Edwards & Sons in St. Louis.

Third-quarter productivity growth was also revised lower, to a 4.5 percent clip from the previously reported 4.7 percent increase.

For 2005, growth in business productivity rose at a 2.7 percent annual rate, down from 3.4 percent growth in 2004 and the slowest increase since 2001.

Unit labor costs were up 2.4 percent in 2005, more than double 2004’s 1.1 percent gain and the largest annual increase since a 4.2 percent gain in 2000.

TIGHTER LABOR MARKET

Economists had expected only a 2.3 percent increase in fourth-quarter unit labor costs—a key gauge of profit and price pressures—and the sharp acceleration in employer costs suggests inflation pressures may be hitting the labor market.

“Unit labor costs were up 3.5 percent which, if sustained, would suggest increased labor cost pressures down the road,” said Cary Leahey, senior managing director at Decision Economics in New York.

“But ... the trend in unit labor costs is still declining and I would argue that the market and the Fed will say that this is a one-time surge,” Leahey said.

The Federal Reserve has raised interest rates 14 times since June 2004 in a bid to stave off inflation pressures, and market-watchers expect one more increase in the months ahead.

A second report from the Labor Department suggested the job market has tightened further since the fourth-quarter.

New claims for U.S. unemployment benefits fell unexpectedly to 273,000 last week from 284,000 the prior week, pushing a four-week average of claims to the lowest level in nearly six years. Wall Street had expected claims to rise to 295,000.

A more comprehensive look at the U.S. job market will come on Friday with the release of the Labor Department’s monthly payrolls report. Employers are expected to have added 240,000 jobs in January after a disappointing 108,000 increase in December. The unemployment rate is forecast to remain at 4.9 percent.

“Claims have been drifting well below normal levels throughout the month. On the eve of the January payrolls report tomorrow, it could just indicate that a blowout (strong) number for payrolls could be in the cards,” said Ronald Simpson, managing director of global currency analysis at Action Economics in Dobbs Ferry, New York.

A separate report showed U.S. companies planned 103,466 layoffs in January, down 4 percent from December but 12 percent higher than the January 2005 level.

Announced layoffs were above 100,000 for a second straight month, according to outplacement firm Challenger, Gray and Christmas, Inc. It said the layoffs largely reflected huge cuts at struggling automaker Ford Motor Co. (F) as well as continued fallout from Hurricane Katrina and a typical post-holiday purge of seasonal workers in the retail sector.

“It is not unusual to see heavy job-cutting in the beginning of the year. Companies are still making adjustments based on the previous year’s performance,” said John Challenger.