U.S. Productivity Growth Slowed in Third Quarter

By Shobhana Chandra

Nov. 6 (Bloomberg) -- U.S. worker efficiency rose in the third quarter at a slower pace than in the previous three months as the economy slumped, a sign employment may take a bigger hit.

Productivity, a measure of employee output per hour, rose more than forecast at a 1.1 percent annual rate, the Labor Department said today in Washington. Labor costs climbed at a 3.6 percent pace, also more than anticipated.

The figures, coming a day before the government's October payrolls report, signal companies may accelerate firings in an effort to trim expenses as the economy heads into a deeper slump. A weakening labor market will contain wage pressures, reinforcing the Federal Reserve's forecast that inflation will moderate.

``Firms can't quite keep up with how quickly demand is falling, though they're reacting quickly by cutting employment and hours,'' said Nigel Gault, chief U.S. economist at IHS Global Insight in Lexington, Massachusetts. ``It makes things worse for the job market. We'll see weaker productivity in the next couple of quarters.''

Treasuries were little changed, with the benchmark 10-year note yielding 3.71 percent as of 8:59 a.m. in New York, up 1 basis point from yesterday. Stock-index futures were lower.

Labor costs increased at a 3.6 percent pace, after a revised second-quarter decline of 0.1 percent.

Economists had forecast productivity would rise at a 0.7 percent annual pace, according to the median of 63 forecasts in a Bloomberg News survey. Estimates ranged from a gain of 2 percent to a decline of 0.5 percent. Unit labor costs, which are adjusted for efficiency gains, were projected to increase 3 percent.

More Claims

A separate report showed more Americans than anticipated filed first-time claims for unemployment benefits last week and total jobless rolls climbed to the highest level in 25 years, indicating further deterioration of the labor market.

Hours worked fell at a 2.7 percent pace, the most in six years. Output fell at a 1.7 percent rate, the biggest drop since the 2001 recession.

Compensation for each hour worked climbed at a 4.7 percent annual pace, up from a 3.5 percent rate in the prior quarter. Adjusted for inflation, compensation was down 1.3 percent from a year ago, the biggest 12-month drop since 1995.

Compared with the third quarter of 2007, productivity rose 2 percent, down from a 3.2 percent gain in the 12 months ended in June.

A Labor Department report tomorrow is projected to show the economy lost an additional 200,000 jobs in October, according to the survey median, bringing the total decline in payrolls to almost 1 million so far this year.

Falling Output

Non-farm output last quarter dropped at a 1.7 percent pace, almost as much as the decline in hours worked, leading to the slowdown in productivity. The economy overall shrank at a 0.3 percent pace from July to September, the most since the 2001 recession.

Some economists are concerned that the productivity surge that began in 1996 is waning.

In the 1990s, former Fed Chairman Alan Greenspan was one of the first to recognize productivity was accelerating because of the increased use of computers and the Internet, and that the improvement would contain inflation even as the economy gained strength and unemployment stayed low. The realization allowed the Fed to keep interest rates little changed from 1996 to 1999.

Cutting Staff, Hours

Still, as sales slow, companies are redoubling efforts to protect profits by cutting staff and workers' hours to boost productivity and reduce expenses. Dell Inc., the world's second- largest personal-computer maker, this week said it is offering unpaid leave to workers and severance packages to employees who voluntarily quit their jobs.

Airlines are among the companies focused on lowering expenses as fuel costs remain elevated and consumers cut back on travel. AMR Corp.'s American Airlines has said it is shrinking U.S. routes for its main jet operations by as much as 12 percent as it parks more than 100 planes and trims the workforce by 8 percent, or about 6,840 jobs.

``Airlines are not generating enough revenue to cover their costs,'' AMR's Chief Executive Officer Gerard Arpey said in an interview this month. ``We're going to be very cautious about our capacity for next year.

To contact the reporter on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net