Worker output grows at 3.8% annual rate

WASHINGTON — WASHINGTON - U.S. worker productivity grew at a 3.8 percent annual rate from January through March, faster than the final quarter of 2003, as investment in equipment helped employers become more efficient. Labor costs rose.

The government's measure of the work done by one employee in an hour showed a 2.5 percent annual rate of increase in October-December, the Labor Department said. The first-quarter rate also was higher than the 3.5 percent initially reported in May.


Gains in productivity, aided by higher spending on equipment and software, may help companies hold down costs and safeguard profits, economists said. Productivity may slow this year as companies add more employees to keep up with increasing demand.

"These data underscore the reasons for the boom in corporate profitability over the past few quarters," said Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc. in New York. Some tradeoff between productivity and hiring "is good news as far as a sustainable economic expansion is concerned."


The cost of labor rose for a second consecutive quarter, led by wages and benefits, as payrolls expanded. Labor costs still lag behind inflation, economists say. At the same time, restrained costs "can no longer be counted on as a moderating influence on prices," said Stephen Stanley, chief economist at RBS Greenwich Capital in Greenwich, Conn.

Separate reports on jobless claims and the services economy also suggest that employment is on the rise, and they reinforce expectations that payrolls expanded last month.

Initial applications for unemployment benefits fell last week to 339,000 from 345,000, the Labor Department said. Claims have been lower than 350,000 for all but two weeks since late February. Claims averaged 402,000 in 2003.

An index of employment in the services economy, which accounts for about 85 percent of gross domestic product, rose to a 6 1/2 -year high in May. The Institute for Supply Management's report on the state of the services economy, not just employment, fell to 65.2 from April's record of 68.4, still showing an accelerating expansion.

Factory orders declined 1.7 percent in April, the most in a year, after a March increase of 5 percent that was the largest since June 2000, the Commerce Department reported. Orders were up almost 11 percent from April 2003.

The revisions to productivity came as a result of faster economic growth than previously estimated. Last month, the Commerce Department said gross domestic product expanded 4.4 percent in the first quarter, up from the advance estimate of 4.2 percent.

Spending on equipment and software rose at almost a 10 percent annual rate, after increases of 15 percent and 18 percent.

Compared with a year earlier, productivity was up 5.5 percent, the most since it also rose 5.5 percent in the third quarter of 2002.


Economists had forecast first-quarter productivity would grow at a revised 3.7 percent annual rate.

Unit labor costs - the amount paid for each unit of production - rose a greater-than-expected 0.8 percent in the first quarter, after a revised 1.7 percent gain in the previous three months.

The Labor Department originally had reported that costs rose 0.5 percent in the first quarter. Compared with a year earlier, costs were 0.8 percent lower.

Nonfarm output, or total production, rose at a 5.4 percent rate, revised from 4.9 percent, and compared with a 4.2 percent gain in the previous three months. Year-over-year, output rose 5.9 percent, the biggest gain since the third quarter of 1984.

The Labor Department may report today that all employers created 225,000 jobs in May and the unemployment rate held at 5.6 percent, according to a Bloomberg survey of economists. About 625,000 jobs were added in March and April, the biggest two-month increase in four years.

Among manufacturers, productivity rose at a 2.9 percent pace, after growing at a 4.8 percent rate in the fourth quarter. The first-quarter pace was slower than the 3.1 percent initially reported. The Labor Department said the change was the result of a decline in productivity at makers of nondurable goods.