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Productivity practically grinds to a halt

The meager gain, coupled with a modest bump in wages, could lead to a cut in interest rates.

By ASSOCIATED PRESS
Published December 6, 2006


WASHINGTON - Growth in worker productivity slowed sharply in the summer while wages and benefits rose at a rate far below a previous estimate, a development likely to ease inflation worries at the Federal Reserve.

Productivity edged up at a 0.2 percent annual rate in the July-September quarter, the Commerce Department said Tuesday. That was slightly better than the zero change reported a month ago.

Wages and benefits per unit of output increased at an annual rate of 2.3 percent in the third quarter, much slower than the 3.8 percent advance previously estimated.

"Based on these numbers, the Fed can rest easy about the threat of inflation," said Nariman Behravesh, chief economist at Global Insight, a private forecasting firm. "The only debate now seems to be about when the Fed will cut" interest rates.

Behravesh said if inflation remains benign and the overall economy continues to show weakness, the central bank might move as soon as March to start cutting rates.

After raising rates for two years to make sure inflation did not get out of hand, the Federal Reserve has left them unchanged since the summer with analysts expecting the Fed to remain on hold next week at its last meeting of the year.

The good news on inflation helped Wall Street rally for a second straight session. The Dow Jones industrial average rose 47.75 points to close at 12,331.60.

Factory orders drop

In other economic news, the Commerce Department said that orders to U.S. factories plunged 4.7 percent in October, the third decline in the past four months, and the biggest drop in more than six years.

The manufacturing sector is starting to experience the adverse impact from this year's slowdown in the overall economy with auto sales and home construction suffering. Orders for durable goods, items expected to last at least three years, dropped 8.2 percent.

The weakness was led by a plunge in demand for commercial aircraft, but orders for other products including autos and computers also fell. Demand for nondurable goods such as gasoline and food edged down 0.3 percent.

A third report showed that the service sector of the economy, where most Americans work, grew at a quicker pace in November than in the previous month, shaking off some effects of the housing slump.

The Institute for Supply Management reported that its index of activity in service industries rose to 58.9 in November from 57.1 in October. That performance stood in contrast with the institute's manufacturing gauge, which dipped into recession territory last month.

The 2.3 percent increase in labor costs followed a 2.4 percent plunge in the second quarter and a 9 percent surge in the first quarter this year. The quarterly changes have been skewed by the payment of large bonuses at the beginning of the year.

While rising wages are good news for workers, the increases could fuel unwanted inflation when productivity, the amount of output per hour of work, is slowing sharply.

Increases in productivity are the key factor pushing living standards higher because they mean that businesses can pay their workers more because of the increased output without having to raise the price of their products.

However, if labor costs outpace the rise in productivity, it means that businesses either have to raise the cost of their products, which can push inflation higher, or trim profit margins.