Productivity Rises Amid U.S. Slowdown

U.S. productivity rose at a solid pace in the first quarter, suggesting companies are adjusting quickly to the economic slowdown by shedding workers and cutting back on the number of hours worked. Unit labor costs -- a key gauge of inflationary pressures -- rose a mild 2.2% in the first quarter, and were up just 0.2% from a year ago. That was the smallest annual rise since 2004, and underscored workers' difficulty in securing higher wages during a slowdown. Labor is the biggest single expense in producing goods and services. Gains in productivity are crucial to allowing the economy to expand without rising inflation or declining profits. But Wednesday's report suggests that companies are cutting back on workers and hours worked. The number of hours worked tumbled at a 1.8% pace, the biggest drop in five years, reflecting recent declines in nonfarm payrolls to start the year. Long-term issues like productivity and underlying growth potential have taken a back seat to crises, centered in the housing and credit markets, that have commanded the Fed's policy. Last week, the Fed lowered the federal-funds rate -- at which banks lend to each other overnight -- by a quarter-percentage-point to 2% but signaled in a statement that it is likely to hold rates steady for an extended period. If productivity growth stays healthy, easing inflation concerns, the Fed probably won't be in a hurry to raise rates. The weak dollar also may be contributing to the growth in productivity by channeling more of the economy's resources into business involved in exports. Export-intensive industries tend to have higher productivity than the economy-wide average, studies show. That offsets to some extent the lower productivity found in fast-growing service sectors. Manufacturing-sector productivity jumped 4.1%, almost double the average for the economy overall. Meanwhile, consumer borrowing in the U.S. rose in March at an annual rate of 7.2%, the fastest pace in four months and more than double the 3.1% increase of the previous month, the Fed reported. The gain was much larger than economists had expected.