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The squeeze on American pocketbooks

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Other parts of the economy may help pick up the slack. With the world economy expanding, exports should contribute solidly to gross domestic product (GDP). And many economists expect to see businesses invest more of their record profits in new equipment and facilities. That, in turn, could mean more jobs and paychecks. Forecasters generally expect strong economic growth in the first few months of this year, after hurricanes and slower consumer spending dragged down GDP growth to a 1 percent annual pace for the last three months of 2005.

Indeed, the Federal Reserve remains more concerned about possible inflationary pressures than about economic growth falling below a normal pace of about 3 percent. Earlier this week, the Fed moved to constrain those pressures for the 14th time since June 2004, bringing its short-term interest rate to 4.5 percent. Another rate hike is considered likely in March.

Thursday's productivity report did little to assuage concerns about inflation. For years, unexpectedly strong gains in output per hour - a productivity bonus - helped the economy grow without upward pressure on prices.

By becoming more efficient, companies have more cash flowing to their bottom line. Productivity can accelerate economic growth and raise living standards. In the current expansion, it has created record corporate profits. But a lower than normal amount has gone into pay raises. And now, the pace of improving efficiency appears to be slowing down, at least temporarily.

The productivity rate actually fell for the fourth quarter of 2005. Meanwhile, the cost of labor per unit of output rose by 2.4 percent for the year, up from 1.1 percent in 2004.

Fed policymakers could take that as a sign of inflationary wage pressures starting to build. They would rather see wage hikes matched by productivity gains.

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