U.S. Productivity Slows, Labor Costs Rise

The productivity of American workers slowed to a standstill in the summer while wage pressures were rising at the fastest clip in more than two decades, a combination likely to raise inflation concerns at the Federal Reserve.

The Labor Department reported Thursday that productivity, the amount of output per hour of work, showed no change in the July-September quarter while labor costs rose by 3.8 percent. For the past year, labor costs are up by 5.3 percent, the fastest increase since 1982.

In other economic news, the number of newly laid off workers filing claims for unemployment benefits unexpectedly shot up last week to the highest level in more than three months. A total of 327,000 fired employees filed benefit claims, up by 18,000 from the previous week.

The total number of jobless claims, which are adjusted for normal seasonal variations, was the highest since early July and raised concerns about whether the slowing economy is finally beginning to push companies to lay off workers.

The flat productivity reading in the third quarter was the poorest showing since a 0.1 percent decline in productivity in the final three months of last year. Over the past four quarters, productivity has risen by 1.3 percent, the weakest showing since a 1.1 percent rise in early 1997.

The 3.8 percent rise in the cost of labor per unit of output followed even bigger gains of 9 percent in the first quarter and 5.4 percent in the second quarter. Those increases pushed labor costs up by 5.3 percent for the year ending in September, the biggest gain since late 1982.

The Federal Reserve raised interest rates 17 consecutive times in an effort to slow the economy enough to bring inflation pressures under control. The Fed has left rates unchanged for three straight meetings, hoping that it has done enough to slow economic growth.

However, the significant slowing in productivity growth and the continued rise in wage pressures, if not reversed in coming quarters, could prompt the Fed to resume raising interest rates to fight inflation.

Since 1995, the country has enjoyed a decade of strong gains in productivity, which is the primary ingredient needed to lift living standards. Increased output means that companies can pay their workers more without having to raise the cost of their products — increases that push inflation higher.

The concern is that with productivity gains slowing over the past year and the cost of labor rising, these trends could make the Fed's job of keeping inflation under control more difficult.

The rise of 18,000 in the level of jobless claims was far above the 2,000 increase that analysts had been expecting. So far, the slowing economy has prompted companies to trim their plans to hire new workers, but they have resisted laying off current employees. However, the severity of the slowdown could be prompting them to start laying off existing workers.

The government will report on the October jobs picture on Friday. The expectation is that unemployment will remain at a low of 4.6 percent and hiring will rebound to 125,000 new jobs, up significantly from the anemic 51,000 new jobs created in September.

Meanwhile, orders to factories for manufactured products rose by 2.1 percent in September, the biggest increase in six months, but virtually all of the strength came in a surge in orders for commercial aircraft. The Commerce Department said that orders for long-lasting durable goods were up 8.3 percent, offsetting a 4.6 percent drop in demand for food, gasoline and other nondurable products.

The increase in durable goods, which was revised up from an initial estimate last week of a 7.8 percent gain, reflecting a huge 189.7 percent surge in demand for commercial aircraft. Excluding airplanes and other transportation products, factory orders would have fallen by 2.4 percent. The drop in nondurable goods was attributed in part to lower prices for petroleum products.

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