Productivity growth slows in 3Q as economy shrinks

Published 10:01 am Thursday, November 6, 2008

WASHINGTON – The efficiency of U.S. workers slowed sharply in the summer as a huge pull back by American consumers threw the national economy into reverse.

The Labor Department reported Thursday that productivity — the amount an employee produces for every hour on the job — grew at an annual pace of 1.1 percent in the July-to-September quarter, down from a 3.6 percent growth rate in the second quarter.

With productivity growth slowing, labor costs picked up. Unit labor costs — a measure of how much companies pay workers for every unit of output they produce— increased at a 3.6 percent pace in the third quarter, compared with a 0.1 percent rate of decline in the prior period.

Worker productivity growth slowed as overall production, or output, declined, reflecting the hit to consumers and the economy as a whole from the housing, credit and financial debacles.

In the latest sign of the ailing job market, the number of people continuing to draw unemployment benefits jumped by 122,000 to 3.84 million in late October, a separate report from the department showed. It was the highest level since late February 1983, when the country was struggling to recover from a long and painful recession. New filings for jobless benefits last week dipped to 481,000, a still-elevated level that suggests companies are in a cost-cutting mode.

The 1.1 percent productivity growth logged in the summer beat economists’ expectations for a 0.8 percent growth rate. The pick up in labor costs— while welcome to workers — was faster than the 2.8 percent pace economists were forecasting.

Economists often look at labor compensation for clues about inflation. These days, however, the Federal Reserve and analysts are more concerned about the economy’s feeble state. While the pick up in labor costs might raise some economists’ eyebrows, the Fed is predicting inflation pressures will lessen as the economy loses traction.

The 1.1 percent productivity gain was the smallest since the final quarter of last year, while the increase in labor costs was the biggest since that time.

Hoping to prevent a deep recession, the Federal Reserve last week ratcheted down interest rates last week to 1 percent and left the door open to further reductions.

The country’s economic state has rapidly deteriorated in the course of just a few months. The economy contracted at a 0.3 percent pace in the July-to-September quarter, signaling the onset of a likely recession. It was the worst showing since the the last recession, in 2001, and reflected a massive pull back by consumers.

With the economy sinking and consumers appetites flagging, employers have slashing jobs. They are expected to cut around 200,000 jobs when the government releases the October employment report on Friday. The unemployment rate — now at 6.1 percent — is expected to climb to 6.3 percent in October.

As American consumers watch jobs disappear and their wealth shrink, they’ll probably retrench even further.

That’s why economists predict the economy is still shrinking in the current October-to-December quarter and will continue to contract during the first quarter of next year. All that more than fulfills a classic definition of a recession: two straight quarters of contracting economic activity.