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U.S. productivity shrinks
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May 8, 2001: 10:01 a.m. ET
Key measure of U.S. worker output negative in 1Q for first time since 1995
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NEW YORK (CNNfn) - U.S. workers were less productive in the first quarter for the first time in six years, the government said Tuesday, a much weaker performance than Wall Street economists had expected.
Productivity, a measure of worker output per hour, fell at a 0.1 percent annual rate in the quarter, the Labor Department said, well below Wall Street forecasts for a 1.1-percent growth rate and the fourth quarter's revised 2 percent rate of growth.
It was the first time productivity shrank since a negative 0.8 percent reading in the first quarter of 1995.
Separately, unit labor costs, a key gauge of inflationary pressures in the economy, rose at a 5.2 percent rate in the quarter, up from a revised 4.5-percent rate the prior quarter. It was the highest since a 5.5-percent rate in the fourth quarter of 1997.
Productivity has slowed markedly since last year, when it jumped at a 6.1 percent rate in the second quarter, and since late 1999, when it rose at an 8 percent rate in the fourth quarter.
Productivity has been a key factor in the economy's 10 years of growth – the longest expansion in U.S. history. As workers produce more per hour, companies can sell more, helping profits while keeping workers' wages in check and limiting inflation pressures.
'Moment of truth' for productivity?
Many economists have credited productivity gains in large part to businesses' investments in computers and other technology, but some fear the boom is over, at least for now.
"This is the moment of truth for productivity, to see what part of those stunning gains of the previous three years had been related simply to the cyclical part of the whole story, and which part of those gains represented underlying increases in productivity trends," said Anthony Karydakis, senior financial economist with Banc One Capital Markets. "Right now, there are some questions being raised."
Slowing productivity and rising labor costs also raise the specter of inflation, which could make the Federal Reserve less aggressive when it considers cutting interest rates at its meeting scheduled for May 15.
The Fed already has cut rates four times this year in an effort to revive the sluggish economy and avoid a recession, but fears the possibility of fueling inflation with its rate cuts.
The productivity data follow reports Friday showing a big gain in U.S. unemployment in April and more job cuts in that month than in any since the last recession.
Still, many analysts say an economic slowdown usually weakens productivity, and Financial Oxygen economist Steven Wood said the Fed would not be alarmed by last quarter's decline.
"Although the (Fed) will not be pleased with the sharp decline in productivity growth over the past year, they will view it as a cyclical phenomenon rather than a retreat from the productivity-led expansion of the past 5 years," Wood said.
Fed Chairman Alan Greenspan recently expressed his continued confidence in U.S. productivity, saying he expected the weak U.S. economy to hinder growth, but only temporarily.
"I still think (the Fed) will cut 50 basis points next week," said Bill Hornbarger, fixed income strategist with A.G. Edwards & Sons, referring to a half-percentage point cut in short-term interest rates.
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U.S. stocks and bonds showed little reaction to the data, with stock prices trading mixed and Treasurys little changed.
"I think the (bond) market is now focused on other things," said Bill Quan, director of research at Aubrey G. Lanston & Co. "You have a quarterly refunding, a lot of corporate supply and retail sales and consumer sentiment numbers coming out on Friday, which are more relevant than this number." 
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