Productivity Slows Despite Employer Efforts

By Reuters -  |  Posted 2008-11-06

WASHINGTON (Reuters) - Growth in U.S. productivity slowed sharply during the third quarter despite efforts by businesses to keep it aloft by slashing payrolls, a Labor Department report on Thursday showed.

The latest sign of waning U.S. economic vigor coincided with a warning from the International Monetary Fund that global growth prospects were dimming and that the U.S. and European economies will be in recession next year.

Fading demand from shell-shocked consumers fearful for their jobs is a key factor in the U.S. slowdown, and major U.S. retail chains posted disappointing October sales as consumers shunned all but the most crucial of purchases.

"It looks like the financial market crisis that hit us full force in September is starting to have a knock-on effect on Main Street and it's leading corporations to tighten their belts and start to cut staff," said Chris Rupkey, chief financial economist with Bank of Tokyo-Mitsubishi UFJ in New York.

Productivity in non-farm businesses expanded at a 1.1 percent annual rate in the third quarter, less than a third of the second quarter's 3.6 percent rate and down from 2.6 percent in the first quarter.


Separately, the Labor Department said new initial claims for jobless pay fell by 4,000 last week to 481,000. More strikingly, though, the number of people drawing long-term unemployment benefits jumped to a 25-year high of 3.84 million, clear evidence of bleak hiring prospects.

Stock prices dropped sharply for a second straight day as bad economic news kept pouring in.

The situation was similar around the globe, as authorities sought desperately to keep the world economy from slipping into a long and painful downturn.

The Bank of England, the Swiss National Bank and the European Central Bank, covering 15 European nations, cut interest rates Thursday to combat slumping housing markets, weakening manufacturing and rising rates of joblessness.

Productivity measures hourly output per worker and thus can be seen as a measure of U.S. worker efficiency. In good times, employers may try to ramp up productivity by boosting production, while in lean times like now, when demand is weak, they may cut payrolls.

While third-quarter growth softened, it still beat forecasts and some analysts said that was a hopeful sign amid a gloomy current outlook.

"The relatively robust growth through good times and bad suggests that, in the medium-term at least, once the deleveraging and rebalancing are behind us the U.S. economy is still in better shape than many others in the world," said Paul Ashworth, senior U.S. economist with London-based Capital Economics Ltd.

Output plummeted at a 1.7 percent rate during the third quarter, its steepest plunge since a 2.9 percent fall in the third quarter of 2001.


On Friday, the Labor Department is set to release its report on October employment with Wall Street economists forecasting a whopping 200,000 more jobs will be slashed, a 10th straight month of declining payrolls.

A report Wednesday from the Institute for Supply Management showed the services sector shrank sharply in October and a report from ADP Employer Services said private-sector companies cut payrolls dramatically -- implying job losses to be reported Friday could even top current forecasts.

The retail sales report underlined the impact of the financial crisis that grips the U.S. economy. Retail chains posted their weakest sales in more than three decades, foreshadowing what likely will be one of the worst holiday sales seasons in years in the key weeks from Thanksgiving to Christmas.

The International Council of Shopping Centers described the retail sales environment as "simply awful" and said the October results were the worst it had seen in 35 years.

One exception was discounter Wal-Mart Stores Inc (WMT.N: Quote, Profile, Research, Stock Buzz),, which managed a better-than-expected increase of 2.4 percent in October sales at U.S. stores open at least a year.

The Labor Department said unit labor costs, a gauge of inflation and profit pressures that the Federal Reserve monitors, jumped at a 3.6 percent annual rate in the third quarter after declining 0.1 percent in the second quarter. That was well ahead of forecasts for a 2.8 percent annual rate of increase but many input prices, such as for commodities, now are easing.

Hours of work dropped at a 2.7 percent rate in the third quarter, a fifth straight quarter of decline. Real compensation per hour -- which takes into account the impact of rising prices on wage gains -- shrank for a third quarter in a row, falling at a 1.9 percent rate.

(Additional reporting by Burton Frierson in New York, Editing by Andrea Ricci)