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Productivity Falls, Labor Costs Rise -- But That's Good News For Workers

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WASHINGTON — American companies experienced the largest drop in workplace productivity this spring in nearly four years and a rise in labor costs, suggesting businesses may no longer be able to squeeze more work out leaner staffs.

Productivity dropped at an annual rate of 1.8 percent in the April-to-June quarter, the Labor Department said Thursday. That's double the 0.9 percent decline originally reported a month ago.

Unit labor costs rose 1.1 percent, the biggest rise in labor costs since late 2008 and up from the estimate last month of 0.2 percent.

While lower productivity and higher labor costs could spell trouble for corporate profits, it could translate into more hiring and larger incomes for U.S. workers.

The downward revision to the productivity and labor costs came after factoring in the June $50 billion trade gap that showed imports greatly exceeded exports. That lowered economic growth for the April-to-June quarter, too.

Analysts said the period of strong productivity gains that occurred last year has come to an end.

"We don't expect productivity to keep declining, but it's clear that it has become much more difficult for employers to extract ever more output from their existing workforces," said Nigel Gault, chief U.S. economist at IHS Global Insight.

The drop in productivity was the first decline since the final quarter of 2008 and the biggest drop since productivity fell 1.9 percent in the third quarter of 2006.

Falling productivity would normally be viewed as a troubling sign for the economy. But economists believe a short-term drop could provide a boost for the flagging recovery. The belief is that that companies need to start hiring more workers because they can no longer make gains from their existing work force.

Companies cut their payrolls during the recession and relied on fewer workers. That helped bolster their profits but sent unemployment soaring. For all of 2009, productivity shot up 3.5 percent, the best performance in six years.

Over the two years of the recession, 8.4 million jobs were lost and the unemployment rate hit a high of 10.1 percent last fall. It has come down only slightly since and was 9.5 percent in July.

If companies start hiring in large numbers, that would boost incomes. Households would then have money to increase spending, which accounts for 70 percent of economic activity.

Slower productivity and a rise unit labor costs will not raise worries about inflation because those current conditions suggest those pressures are nonexistent.

In fact, some analysts believe the bigger threat at the moment is deflation, a destabilizing bout of falling prices and wages.

The 1.1 percent rise in unit labor costs followed four straight quarterly declines including a 4.6 percent plunge in the first three months of this year. The increase was the largest since labor costs were rising at a 1.2 percent rate in the final three months of 2008.

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