US productivity up strongly

The Commerce Department reported on Thursday that productivity, the amount of output for every hour of work, jumped 4.3% at an annual rate in the April-June quarter, a full percentage point higher than economists expected.

At the same time, labour costs fell at an annual rate of 0.5%, slightly better than expected.

While rising wages and benefits are good news for workers, if those gains outstrip the increase in productivity, it raises the risk that inflation could surge. But the newest productivity report should be welcome news at the Federal Reserve, which has been worried that a big jump in energy and other commodity prices earlier this year could lead to a boost in inflation pressures.

Many private economists believe the central bank has overstated the inflation threat. They argue that the weak economy and rising unemployment will keep the lid on wage inflation, the area that represents the biggest threat to a sustained rise in inflation.

The 4.3% rise in productivity in the second quarter was nearly double the initial estimate released a month ago. The higher figure reflected the big upward revision the government made last week to overall growth for the second quarter, pushing the gross domestic product to a rate of 3.3%, revised from an initial figure of 1.9%.

Avoiding 'stagflation'

GDP represents the economy's total output of goods and services. A higher GDP figure, if the hours of work remain essentially unchanged, means a much better performance for productivity.

The 4.3% rate of increase for productvity followed a more moderate 2.6% rise in the first quarter, and was the biggest gain since a 5.8% spurt in the third quarter of last year. It also was far better than the moderate productivity growth of 1.4% for all of 2007.

The 0.5% drop in unit labour costs followed a 1.2% rise in the first quarter and was the first decline since a 2.4% drop in the July-September quarter of last year.

The Fed from September 2007 through April was aggressively cutting interest rates to make sure the worst housing slump in decades and a severe credit crisis did not push the country into a steep recession.

However, the central bank has left rates unchanged since the April meeting as Fed officials have expressed rising worries that the surge in the price of energy and other products could trigger higher inflation pressures even as the economy was battling sluggish growth.

The central bank wants to avoid a return of the "stagflation" that beset the country during the 1970s when successive oil price shocks set off a wage-price spiral that pushed inflation to double-digit levels at the same time economic growth stagnated.

In its latest survey of economic conditions nationwide, the Fed said on Wednesday that the economy is stuck in a period of slow growth while facing inflation pressures from higher costs for energy and food.

The Fed survey described wage pressures as moderate, reflecting the weak labour market as unemployment has climbed to a four-year high of 5.7% and nearly half-a-million jobs have been lost since January.

- AP