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More wages, no more work

By ASSOCIATED PRESS
Published November 3, 2006

WASHINGTON - The productivity of American workers slowed to a standstill in the summer, while wages 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 showed no change in the July-September quarter, while labor costs rose by 3.8 percent. For the past year, wages and other labor costs are up by 5.3 percent, the fastest increase since 1982.

While rising wages and benefits are good news for workers, they raise concerns about inflation especially at a time when productivity is slowing. If companies decide to pass on their higher payroll costs by boosting the price of their products, that could translate into increased inflation.

"Inflation isn't just the wages and benefits you're paying, but what you're getting from those wages and benefits," said economist Scott Brown at Raymond James & Associates in St. Petersburg. "These numbers imply you're not getting as much for your added labor expense, which is likely to eat into corporate profits."

He said higher labor costs may make the Federal Reserve Board reluctant to lower short-term interest rates, which would disappoint many investors. And, as he noted, rising productivity is the only way you get a higher standard of living over the long run.

However, Brown said the productivity calculations are unreliable and highly volatile, which means they aren't the final word on where the economy is headed. Productivity was up 4.4 percent in the third quarter of last year, then down 0.1 percent in the fourth. This year it was up 4.3 percent in the first quarter and 1.2 percent in the second quarter before leveling off in the third.

"We're getting mixed economic data, some strong and some weak, and it's confusing for people," he said. One hopeful sign: "We haven't seen the full effect of the decline in gasoline prices."

Not the best news

In other economic reports, 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.

In a third report, 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 Labor Department said that the total number of jobless claims, which are adjusted for normal seasonal variations, was the highest since early July, raising concerns about whether the slowing economy is finally beginning to push companies to lay off workers.

An eye on inflation

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 today. The expectation is that unemployment will remain at a low of 4.6 percent and hiring will rebound to 125,000 new jobs, up from the anemic 51,000 jobs created in September.

[Last modified November 3, 2006, 01:46:49]