Productivity Rose More Than Forecast; Labor Costs Up

By Timothy R. Homan

Dec. 3 (Bloomberg) -- U.S. worker efficiency rose more than forecast in the third quarter and labor costs increased less than anticipated, signaling company efforts to rebuild profits are paying off.

Productivity, a measure of employee output per hour, rose at a 1.3 percent annual rate, compared with a 1.1 percent gain estimated last month, revised figures from the Labor Department today in Washington showed. Labor costs climbed at a 2.8 percent rate, less than the 3.6 percent pace forecast.

Companies reduced expenses as the economy contracted by reducing employee hours at the fastest pace in six years and holding the line on wages. The drop in raw-material prices combined with the smaller-than-expected increase in labor costs indicates companies are moving to shore up profits as the economy heads for what may be the longest recession in seven decades.

“Companies can be expected to react by further cost- cutting, which inevitably means reductions in employee head count and hours worked,” Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc in New York, said in a note to clients. “While this will help support productivity and restrain unit labor costs, it will also reinforce the consumer-led aspect of the economic slump.”

U.S. companies eliminated an estimated 250,000 jobs in November, the most since November 2001, ADP Employer Services said today in a report based on payroll data. The drop was larger than forecast.

Better Than Forecast

Economists had forecast productivity would rise at a 0.9 percent annual pace, according to the median of 57 forecasts in a Bloomberg News survey. Estimates ranged from gains of 0.6 percent to 1.5 percent.

The gain in unit labor costs, which are adjusted for efficiency gains, followed a 2.6 percent drop from April through June that was larger than previously estimated.

Hours worked fell at a 3.1 percent pace, the biggest drop since the first three months of 2002. Non-farm output fell at a 1.9 percent rate, the most since the last recession.

Compared with the third quarter of 2007, productivity rose 2.1 percent, close to the 2.5 percent annual average since 1995. Labor costs were up 1.4 percent year-over-year.

The drop in commodity costs is also helping shore up profits and may help companies retain some of the staff they would otherwise have cut in incoming months, said Brian Bethune, an economist at IHS Global Insight in Lexington, Massachusetts.

Cost Management

“We are moving into the point where companies reduced hours as much as they can,” Bethune said. “Cost management is still a major challenge, but there is still some scope to do more on the material-cost and supplier-costs side,” Bethune said.

A Labor Department report Dec. 5 is projected to show the economy lost 325,000 jobs in November, the most since October 2001, according to the survey median. The decline would bring the total drop in payrolls to 1.5 million so far this year.

Gross domestic product contracted at a 0.5 percent annual pace last quarter.

The U.S. economy entered a recession in December 2007, according to a panel at the National Bureau of Economic Research that dates American business cycles. The last time the U.S. was in a recession was from March through November 2001.

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

Productivity Boost

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.

U.S. companies are cutting jobs to improve productivity and to counter a global slowdown in demand. Xerox Corp., the world’s largest maker of high-speed color printers, is eliminating 3,000 jobs and reducing manufacturing costs to save money next year.

“We’re managing our operations with a close eye on the bottom line,” Chief Executive Officer Anne Mulcahy said in a Nov. 24 statement. “The restructuring actions we’re taking this quarter are expected to deliver $200 million in savings next year, giving us greater flexibility to operate even more efficiently and effectively in an uncertain economic environment.”

To contact the reporter on this story: Timothy R. Homan in Washington at thoman1@bloomberg.net