Productivity Retreats in Fourth Quarter

The fourth quarter of 2002 saw productivity fall at an annual rate of 0.2%, recording its worst quarterly showing since the doorstep of recession in the first quarter of 2001.   With the decline, productivity gives back ground after gaining 5.1% in the third quarter (see  DoL Has Good Productivity News ) and 1.7% in the second quarter of 2002, according to a report of Department of Labor (DoL) data by the Associated Press.

Economists were stunned by the latest release, after predicting the period would see a gain of 0.7%.   The anticipated slowdown in productivity growth for the fourth quarter was due to earlier economic releases showing the economy growing at an impeded rate of 0.7%, compared to the 4% growth spurt recorded in the previous quarter.

But the fourth quarter’s decline was not enough to stop the overall increase seen in 2002, as productivity for the year grew by a stellar 4.7%, the strongest showing since the twilight of the Truman administration in 1950.   With 2002’s sparkling performance, productivity showed a marked improvement over the 1.1% increased posted in 2001.

On the Clock

The decline in productivity in the fourth quarter pushed up unit labor costs at a rate of 4.8%, the biggest increase since the third quarter of 2000. That’s discouraging for companies trying to keep a lid on costs. In the third quarter, unit labor costs dipped at a rate of 0.1%.

Meanwhile, hourly compensation in the fourth quarter rose at a much slower 2.2% rate, compared with the inflation-adjusted 3.4% pace in the third quarter.

Productivity, the amount of output per hour of work, is a closely monitored DoL release as economist see gains in productivity as a dampener to inflation.   Additionally, hikes also let companies raise worker salaries without putting upward pressure on prices, which would eat up those wage gains.