Productivity, Wages Both Up

Productivity generic graphic economic labor
AP
The efficiency of American workers rebounded in the opening quarter of this year, growing at an annual rate of 3.2 percent. Wages rose at a brisk pace.

The revival in the January-to-March quarter came after productivity — the amount an employee produces for every hour on the job — actually fell at an annual rate of 0.3 percent in the final quarter of 2005, the Labor Department reported Thursday.

A measure of employers' wage costs, meanwhile, rose a rate of 2.5 percent in the first quarter. While that was down from a 3 percent pace in the fourth quarter, the still-buoyant growth in so-called unit labor costs is likely to raise concerns about inflation.

"While the productivity gain is quite desirable, the increase in unit labor costs is going to rub the Federal Reserve the wrong way," said Richard Yamarone, an economist at Argus Research.

In other economic news, shoppers seemingly undeterred by rising gasoline prices spent energetically in April, giving retailers strong sales for the month.

Wal-Mart Stores Inc., Costco Wholesale Corp., Nordstrom Inc., Abercrombie & Fitch Inc. and Limited Brands Inc. were among the merchants reporting better-than-expected results.

The sales results — along with other recent barometers — suggested the economy carried good momentum into the April-to-June quarter.

New claims for unemployment benefits rose last week by 5,000 to 322,000, the Labor Department said in a separate report. Although jobless claims went up last week, the overall level still pointed to a good job-market climate.

Seasonal adjustment difficulties related to spring recesses may have distorted last week's figure, a department analyst cautioned.

The increase left claims at their highest point since the middle of November. Analysts were expecting a slight dip. Still, the trend has been toward improvement. A year ago, claims stood at 341,000.

On the productivity front, efficiency gains are important to the economy's long-term vitality. They allow the economy to grow faster without igniting inflation. Companies can pay workers more without raising prices, which would cut into those wage gains.

The showing on productivity in the first quarter was stronger than the 2.8 percent growth rate that analysts were forecasting.

The pickup in productivity reflects a rebound in overall economic activity in the first three months of this year. The economy advanced at a brisk 4.8 percent pace in the January-to-March quarter, a considerable improvement over the feeble 1.7 percent pace logged in the final quarter of 2005. That weak showing in the fourth quarter was the main reason why productivity flagged during that period.

Hourly compensation in the first quarter increased at a 5.7 percent rate — more than twice as rapidly as the 2.7 percent growth rate in the previous quarter. Because hourly compensation rose faster than productivity during the first quarter, unit labor costs went up at a 2.5 percent clip.

The Federal Reserve and other economists look at unit labor costs for clues about inflation.

Federal Reserve Chairman Ben Bernanke and his colleagues want to make sure that inflation doesn't threaten economic activity. Thus, policy-makers are expected to boost rates by another quarter percentage point, to 5 percent, when they meet next on Wednesday.

Some analysts believe that will be the last rate increase for a while in the Fed's two-year-old rate-raising campaign to thwart inflation. Others, however, predict rates will rise to 5.50 percent before the Fed takes a break.