US 1Q Productivity Drops, Labor Costs Rise

(Reuters) - Nonfarm productivity fell in the first quarter as companies hired more workers to maintain output, but a moderate rise in wages suggested little pressure on company profits and inflation.

Productivity slipped at a 0.5 percent annual rate, the Labor Department said on Thursday, after rising at an upwardly revised 1.2 percent rate in the last three months of 2011.

The decline in productivity, which measures hourly output per worker, was in line with expectations. Fourth-quarter productivity had been previously reported to have increased at a 0.9 percent rate.

The fall in productivity was the first since the second quarter of 2011, and the biggest decline since the first quarter of that year.

Productivity grew rapidly as the economy emerged from the 2007-09 recession, peaking at an 8.3 percent growth rate in the second quarter of 2009. The gains were driven by companies' cutting costs, particularly for labor.

But businesses are finding it hard to squeeze more output from the existing pool of labor. In the first quarter, employers added about 635,000 new jobs to their payrolls, even though the economy grew at an anemic 2.2 percent annual rate.

Some Federal Reserve officials, including Chairman Ben Bernanke, believe companies drastically cut their workforces and are now seeking an alignment with the expected demand for their products.

The productivity report showed unit labor costs grew at a 2.0 percent rate in the first quarter after increasing at a 2.7 percent pace in the fourth quarter.

However, the slump in productivity and the rise in labor costs are unlikely to pressure corporate profits given that businesses have very strong balance sheets. American companies are sitting on an estimated $2 trillion cash pile.

Wage inflation remains benign amid an 8.2 percent unemployment rate. In the first quarter, hours of all workers increased at a 3.2 percent rate after rising at a 2.4 percent rate in the October-November period.

The increase in hours last quarter was the largest since the second quarter of 2010.

Growth in compensation per hour, when adjusted for inflation, fell at a 0.9 percent rate after rising 2.6 percent in the fourth quarter.

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