March 7, 2012
U.S. companies will have to keep hiring steadily to meet their customers' rising demand. That's the message that emerged Wednesday from a report that employers are finding it harder to squeeze more output from their existing staff.
Worker productivity rose at an annual rate of 0.9 percent in the October-December quarter, the Labor Department said. While that's a slight upward revision from last month's preliminary estimate, it's half the pace from the July-September quarter.
Productivity, the amount of output per hour of work, grew last year at the slowest pace in nearly a quarter of a century.
A slowdown is bad for corporate profits. But it can be a good sign for future hiring. It may mean that companies have reached the limits of what they can get out of their existing work force and must add more workers if they want to grow.
That trend already looks to be happening. A report Wednesday from ADP, a payroll provider, estimated that companies added 216,000 workers in February. The survey did not include government agencies, which have been cutting jobs.
A more reliable read on hiring will come Friday when the government issues its February jobs report. Expectations are high after two strong months of job growth in December and January, a steady decline in unemployment benefit applications and a jump in consumer confidence.
"The slowing trend in productivity growth has largely confirmed that the cyclical bounce in productivity that the economy typically experiences following a recession has run its course," said Troy Davig, an analyst for Barclays Capital Research. "Future productivity gains are likely to be harder won, so firms will likely need to rely increasingly on adding to payrolls to increase output, rather than squeeze existing resources."
The economy has added an average of 200,000 net jobs per month from November through January. That has helped lower the unemployment rate to 8.3 percent.
One concern is that labor costs are on the rise. They increased at a 2.8 percent annual rate in the fourth quarter. While that lower than the 3.9 percent rise in the third quarter, it was much higher than the initial fourth-quarter estimate.
Rising labor costs could push inflation higher if businesses are forced to raise prices. Some economists said that's unlikely to be sustained as long as millions of Americans remain out of work and others are seeing little growth in wages.
Productivity in the fourth quarter was revised higher after the government said total economic growth was slightly faster than first thought. The Commerce Department said last week that the economy grew at a 3 percent annual rate in the October-December quarter, slightly stronger than the initial estimate.
Productivity grew last year just 0.4 percent. That was the smallest gain since 1987 and far below the 4 percent growth in 2010, the most in nine years. However, the main reason productivity soared in 2010 was that it followed the worst recession in decades, when employers laid off millions of workers.
Richard DeKaser, an economist with the Parthenon Group, said the pattern seen in productivity during the recession and in the past two years of recovery is very typical. Productivity climbs as businesses lay off workers in the face of falling demand.
When demand picks up, companies are at first hesitant to add workers because they are worried that the rebound may falter. Instead, DeKaser said, companies make do with their existing work force. It is only when they reach the limit of how much work they can squeeze out of existing employees, that they resume hiring.
That return to more normal hiring patterns is good for the economy because it reduces unemployment and provides consumers with more spending power. Consumer spending accounts for 70 percent of economic growth.