Productivity Surges As Companies Cut Labor Costs

Worker productivity, the single biggest factor determining living standards, grew at the fastest pace in nearly six years in the spring while labor costs fell by the most in nine years, as companies slashed costs to survive the recession.

From The Planet Money Blog

The Labor Department said Wednesday that productivity, the amount of output per hour of work, rose at an annual rate of 6.6 percent in the April-June quarter, the largest advance since the summer of 2003. Economists expected an increase of 6.4 percent, matching the government's initial estimate last month.

Labor costs fell at an annual rate of 5.9 percent. That's the largest drop since the second quarter of 2000, and slightly bigger than the 5.8 percent decline estimated a month ago.

Increases in productivity can help boost living standards because companies can increase wages financed by rising output. But during the recession, companies have been using their productivity gains to bolster their bottom lines as many struggle to stay in business.

This cost-cutting helped many companies report better-than-expected second-quarter earnings despite falling sales. But economists worry that such aggressive cuts will make it harder to mount a sustainable recovery. That's because the lack of wage growth and shortage of jobs will depress household incomes and make the prospects for a sustained rebound in consumer spending less likely.

Consumer spending is critical to the recovery since it accounts for about 70 percent of total economic activity.

The slight changes in Wednesday's report reflected that total output, as measured in productivity terms, did not drop as much as initially estimated and hourly compensation, after adjusting for inflation, did not rise as much.

The 6.6 percent rate of increase in productivity in the second quarter compared with a 0.3 percent rise in the first quarter. It was the largest quarterly increase since a 9.7 percent jump in the third quarter of 2003.

The 5.9 percent drop in unit labor costs followed a 5 percent decline in the first quarter.

Businesses producing more with fewer employees means that unemployed Americans continue to face a dismal job market.

While many of the nation's big retailers have said back-to-school sales have been dismal, the government's Cash for Clunkers program did boost auto sales in August.

Ford Motor Co., Toyota Motor Corp. and Honda Motor Co. all reported increased sales in August as consumer snapped up their fuel-efficient models. But rivals Chrysler Group LLC and General Motors Co., which have just emerged from bankruptcy protection, saw their sales fall for the month.

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