Ahead of the Bell: Productivity

AP News
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Posted: Dec 03, 2009 6:17 AM

Productivity likely surged in the third quarter while labor costs fell, normally good signs that inflation remains under control. But in the current tough economy, it also signals that workers' wages are getting squeezed and they won't have as much to spend to bolster future economic growth.

Economists surveyed by Thomson Reuters expect that productivity rose at an annual rate of 8.5 percent in the July-September period. That would be a sizable gain but slightly lower than the initial estimate of 9.5 percent growth.

The economists believe unit labor costs fell at an annual rate of 4.2 percent in the third quarter, a big drop but smaller than the 5.2 percent decline initially estimated.

The slight revisions would still leave productivity rising at a historically rapid pace, helping companies improve their profit outlooks, while the drop in unit labor costs means that workers are seeing their wages and benefits squeezed further.

The Labor Department is scheduled to release its revised estimates for productivity and unit labor costs Thursday at 8:30 a.m. EST.

Productivity is the amount of output per hour of work. Employers, struggling to cope with the longest and deepest recession since the 1930s, have laid off millions of workers. As long as companies can get their workers to produce more, they have little reason to hire _ at least until consumer spending picks up.

But with the unemployment rate already at a 26-year high and expected to climb further, the concern is that households will not boost spending significantly, meaning that demand will stagnate and the economic recovery will remain sluggish.

The revisions expected in the productivity and unit labor costs figures for the third quarter will reflect that the government revised lower its initial estimate for overall economic growth. The initial estimate that the gross domestic product, the country's total output of goods and services, grew at an annual rate of 3.5 percent in the third quarter. But that figure was revised last week to show growth at a 2.8 percent pace, still the first positive GDP number after a record four quarterly declines.

The falling labor costs reflect that workers seeing widespread layoffs have been unable to demand higher wages and in many cases have seen their salaries squeezed as companies struggle to bolster their bottom lines.

Productivity is considered a key ingredient for rising living standards. It lets companies pay their workers higher wages and finance the wage increases by increased output rather than by boosting the cost of their products. Federal Reserve officials closely watch productivity and labor costs to see if they can detect any threats of future inflation. But in the current weak economy, the Fed has said it plans to keep a key interest rates low for some time to come.

While economists believe the recession has ended, the unemployment rate is expected to keep rising until next summer, possibly climbing to 10.7 percent or even higher. Economists believe when the November jobless figure is released on Friday it will show no change from the 10.2 percent hit in October, but they expect further increases in coming months as layoffs continue.

Gannett Co. this week said it was cutting 26 newsroom jobs at its flagship USA Today newspaper and eliminating 11 positions at USA Weekend magazine. Another media company, the Greenspun Media Group, which publishes the Las Vegas Sun, announced it was reorganizing its operations in a cost-cutting move and would lay off an unspecified number of workers.