Economic Growth Falls Off

Worker productivity - output per hour worked - slowed sharply in the second quarter, the Labor Department said Thursday.

In the nonfarm business sector, it slowed to a 1.3 percent annual growth pace in the second quarter of the year, down from the revised 3.6 percent pace in the first quarter.

Despite the slowdown in the quarter, productivity was 2.9 percent higher than it was a year earlier, the highest year-on-year reading since early 1996.

Productivity in manufacturing rose 4.9 percent in the quarter, down from 6.3 percent in the first quarter.

A panel of economists surveyed by CBS.MarketWatch.com was expecting productivity to slow to 2.2 percent, based on the previously released figures on output and hours worked.

Financial markets mostly ignored the report.

The productivity figures generally do not move financial markets, because they are beset by measurement problems and are thought to be too backward looking. But Federal Reserve Chairman Alan Greenspan has specifically pointed to productivity growth as a key indicator he and his colleagues at the Fed are examining to determine whether inflation is getting to be a problem.

The productivity numbers are weaker than expected, a bearish sign for financial markets fearing a rate hike in August. The figures could be revised higher, however, if the next estimate of second-quarter gross domestic product comes in higher. The Fed's Open Market Committee meets on Aug. 24.

In the second quarter, unit labor costs (the best measure of the cost of labor inputs) grew at a 3.8 percent pace, up from 0.8 percent in the first quarter and the fastest since the fourth quarter of 1997. Real hourly compensation rose 1.5 percent in the quarter, the slowest since the second quarter of 1997.

The department revised productivity of nonfinancial corporations in the first quarter from 4.2 percent to 5 percent. The figures on second-quarter productivity in the nonfinancial sector -- which is the sector of the economy that Greenspan focuses on -- won't be released until Sept. 2.

Once again, productivity in manufacturing set the pace. Productivity in durable goods manufacturing rose 9 percent, while productivity in nondurable goods fell 0.3 percent as output fell.

Productivity rose 2.2 percent in all of 1998, about twice the average since the 1970s.

In a separate release, the department said first-time claims for unemployment benefits rose 4,000 to 279,000 in the latest week.