By Martin Crutsinger, AP Economics Writer
WASHINGTON (AP) — Worker productivity dropped this spring for the first time in more than a year, a sign that companies may need to step up hiring if they hope to grow.
Productivity declined at an annual rate of 0.9% in the April-to-June quarter after posting large gains throughout 2009, the Labor Department said Tuesday. Unit labor costs edged up 0.2% in the second quarter, the first increase since the spring of 2009.
Output of U.S. workers is the key ingredient to boosting living standards. It allows companies to pay workers more because of the increased production without being forced to raise the cost of their goods, which sparks inflation.
In most cases a slip in productivity would be a troubling sign for the economy. But some analysts believe a short-term drop is needed to boost the recovery. That's because it could be a signal that employers can no longer squeeze extra output out of leaner staffs.
"This could be a turning point as far as hiring goes," said Joel Naroff, president of Naroff Economic Advisors.
Companies cut their payrolls during the recession and relied on fewer workers. For all of 2009, productivity shot up 3.5%, the best performance in six years.
However, over the two years of the recession, 8.4 million jobs were lost. Unemployment hit a high of 10.1% last fall and is now at 9.5%.
Economists believe companies need to stop slashing their work forces and start rehiring laid off workers. That will boost incomes and give households the support they need to increase consumer spending, which accounts for 70% of economic activity. And that would ultimately lead to more demand for those companies' products.
"Economists often tout the long-run benefits of strong productivity growth, but given the precarious state of the economy, a little more employment, even at the expense of productivity, would likely be helpful in the near term," said Sal Guatieri, senior economist at BMO Capital Markets.
Stocks retreated Tuesday as investors grew more cautious ahead of an announcement on interest rate policies later Tuesday by the Federal Reserve.
A second economic report Tuesday showed that inventories held by wholesale businesses edged up only a slight 0.1% in June while sales fell 0.7%.
It was the second consecutive drop in sales at the wholesale level and the biggest decline in 15 months. It raised worries about whether demand may be faltering, a development which could cause businesses to cutback on their restocking and act as a further drag on the economy.
A slowing in productivity and a rise in unit labor costs will not raise worries about inflation in the current environment because inflation pressures at the moment are nonexistent.
In fact, some analysts believe the bigger threat is the possibility of deflation, a destabilizing bout of falling prices and wages.
The 0.9% drop in productivity in the second quarter was the first decline since a 0.1% dip in the fourth quarter of 2008. It was the biggest fall since a 1.3% decrease in the third quarter of 2008.
The 0.2% rise in unit labor costs followed a 3.7% plunge in labor costs in the first quarter. It was the first increase since a 0.6% rise in the second quarter of last year.
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