Productivity surges, job growth should follow

Productivity surges, job growth should follow

By Lucia Mutikani Lucia Mutikani

WASHINGTON (Reuters) – U.S. business productivity grew at its fastest clip in six years in the third quarter and new claims for jobless aid fell to a 10-month low last week, suggesting the labor market may be starting to bottom out.

The Labor Department said on Thursday that productivity surged at a 9.5 percent annual rate, the quickest pace since the third quarter of 2003, as companies squeezed more output from a smaller pool of labor to hold the line on costs.

The Labor Department also reported that initial claims for state unemployment benefits dropped to 512,000 in the week ended October 31, the lowest level since early January. Markets had expected a decline to only 523,000, from the 530,000 reported in the prior week.

Some healing of the labor market is crucial to sustaining and strengthening the economy's recovery after its worst recession in 70 years, with employment key to underpinning consumer spending.

Analysts doubt that the rapid growth rate in productivity, which measures the hourly output per worker, can be sustained, which some analysts say means businesses may soon have to step up hiring to meet the demand for their goods and services.

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The Dark Side of the Productivity Surge

The third-quarter productivity numbers show that business is squeezing more work out of employees in hard times By Peter Coy

Rising productivity is usually one of the best things you can hope for in an economy. It means people are producing more for each hour they work. That's the path to higher living standards.

But the huge burst in productivity that the U.S. economy experienced in the third quarter is not entirely good. In fact, it's a sign that the U.S. economy is still in a sickly condition—a conclusion that is likely to be driven home by the latest job-loss figures release on Nov. 6. Economists who cheered the productivity number are ignoring the dark side of its sudden growth.

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The trouble is that with demand so weak, employers may not be able to enjoy the benefits of those lower unit labor costs, says Paul Ashworth, senior U.S. economist for Capital Economics in Toronto. Instead, competition for scant business may force them to pass along their labor savings to customers by cutting the prices of their goods and services. There could be, he says, a vicious cycle of falling prices and falling wages, worsened by the fact that Americans have huge debt burdens that loom larger when incomes fall. In a research note, Ashworth said: "The upshot is that deflation is still by far the biggest threat."

University of Texas economist James Galbraith, in an e-mail message, says that "'Productivity' in this situation is a fairly meaningless construct," adding that the decline in hours "is not good for the working population." Galbraith said he sees "little reason for optimism" that economic growth will be strong enough to get employment back on track anytime soon.

True, it's not wise to read too much into one quarter's numbers. Economic Policy Institute economist Josh Bivens notes that "productivity quarterly numbers get really kind of goofy and volatile around turning points in the economy," such as now. Also, some optimists argue that higher productivity growth will eventually encourage companies to do more hiring. "In the second half of 2010 businesses will accumulate a strong pent-up desire to add more high-quality workers into their teams," IHS Global Insight (IHS) Chief U.S. Financial Economist Brian Bethune said in a Nov. 5 report.

But Capital Economics' Ashworth argues that the optimists on productivity are getting things backwards. The optimistic argument is that higher productivity will lead to more employment. But he notes that it was falling employment that caused the higher productivity in the first place. "People are basically saying the decline in employment is going to cause more employment," Ashworth says. And that is not a very good bet.