- The Washington Times - Saturday, June 1, 2002

ASSOCIATED PRESS

Productivity, a crucial ingredient in the economy's long-term vitality, turned in its best performance in almost two decades during the first quarter of the year as hard-pressed companies produced more despite fewer workers.

Productivity the amount of output per hour of work soared at an annual rate of 8.4 percent in the January-March quarter, after a strong 5.5 percent growth rate in the previous quarter, the Labor Department reported yesterday.

The latest figures show that the recession last year didn't derail healthy productivity gains seen since the late 1990s and bodes well for keeping the nation's economic recovery on solid footing, economists said.

In another encouraging report, orders to U.S. factories rose 1.2 percent in April, the biggest gain in six months, the Commerce Department said. That reflected stronger demand for a wide variety of goods, including cars, household appliances and machinery.

"This is all positive news. It should give skeptics some evidence that the economic recovery in the United States is in fact going to have staying power," said Lynn Reaser, chief economist at Banc of America Capital Management.

The 8.4 percent rise in productivity in the first quarter marked the biggest increase since the second quarter of 1983 and matched many analysts' expectations.

Economists predicted that the new reading on first-quarter productivity would be slightly lower than the 8.6 percent rate initially estimated, because the economy grew a little less briskly during the period than previously thought.

The impressive productivity gain came at a price. Businesses, responding to the lingering effects of recession, cut back on their payrolls in the first quarter. That caused the total number of hours worked to fall 2.1 percent. Output rose at 6.1 percent.

"As far as downsides go, this is roughly the equivalent of eating your broccoli. It may be tough to stomach at first, but it makes you stronger and healthier in the long run," said Mark Vitner, economist at Wachovia Securities.

In the long run, productivity gains are good for workers, for the economy and for companies, whose profits took a hit during the slump.

Gains in productivity allow companies to pay workers more without raising prices, which would eat up those wage gains. Productivity gains also permit the economy to grow faster without triggering price inflation. If productivity falters, however, pressure for higher wages could force companies to raise prices and thus worsen inflation.

The rise in productivity helped to push down unit labor costs, a gauge of inflation. These costs dropped at an annual rate of 5.2 percent in the first quarter, after a 3.1 percent rate of decline in the previous quarter. That also bodes well for improving companies' profits margins, economists said.

"The surge in productivity growth is a powerful sign that the recovery is alive and well, and that corporate earnings will end up being strong this year," said Merrill Lynch economist Gerald Cohen.

Productivity normally tends to rise strongly when the economy is booming. But gains in productivity can become weak, or productivity can fall, when the economy slows or contracts.

For all of 2001, productivity grew by 1.9 percent, a slowdown from the 3.3 percent gain posted in 2000 but a respectable showing nonetheless, given the slump.

Federal Reserve Chairman Alan Greenspan has said he remains bullish about the long-term prospects of productivity growth.

He and other economists have suggested that the strong productivity gains seen in the late 1990s were more than a fluke related to the economic boom and big investments by companies in productivity-enhancing computers and other high-tech equipment. Rather, those gains may reflect a more lasting change involving how companies are managed and structured, and how they put technology to use.

For the 12 months ending in March, productivity rose 4.2 percent, the biggest gain since the second quarter of 2000. Unit labor costs dipped by 0.8 percent.

With strong productivity growth keeping a lid on inflation, economists said the Federal Reserve has the luxury of leaving short-term interest rates unchanged at 40-year lows through the summer.

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