Ahead of the Bell:
Productivity

[November 03, 2011]  WASHINGTON (AP) -- U.S. workers were probably more productive this summer and cost their employers less, a trend that is good for economic growth but not necessarily for hiring in the short run.

Economists expect productivity rose at an annual rate of 2.5 percent in the July-September quarter, according to a survey by Factset. Labor costs are forecast to have dropped 0.4 percent.

Productivity is the amount of output per hour of work. Higher productivity is generally a good thing because it can raise standards of living by enabling companies to pay workers more without raising their prices and increasing inflation.

Rising labor costs reduce corporate profits. When workers are less productive and cost more, companies are less likely to add jobs -- until demand picks up.

Worker productivity fell in the first six months of the year, while labor costs increased. Consumers cut back sharply on spending during that stretch in the face of higher food and gas prices, which slowed overall economic growth.

Productivity likely increased because growth picked up this summer. Consumers increased their spending at triple the rate from the spring. That helped the economy expand at an annual rate of 2.5 percent in the July-September quarter, the best quarterly growth in a year.

When demand rises and productivity is low, it's usually a sign that businesses have reached the limit on the amount of work they can squeeze out of their work forces. That often leads some to hire more workers, if they want to grow.

But economists worry that the demand from this summer won't be sustained. The growth was fueled by Americans who spent more while earning less and by businesses that invested in machines and computers, not workers.

With more jobs and higher wages, consumers are likely to pare spending next year.

Economists expect productivity to slow over the next couple of years while labor costs rise. Forecasters with the National Association for Business Economics predict that productivity growth will slow to 1 percent this year compared to growth of 4.1 percent in 2010.

However, analysts said that the slowdown in productivity growth has played a role in the modest gains seen this year in employment.

[Associated Press]

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