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US workers' productivity plummeted in first quarter

American workers' productivity fell sharply at an annual rate of 1.2 percent in the first quarter. It was the biggest drop in eight years.

But economists were not alarmed.

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"It is just a cyclical thing," says Cynthia Latta, an economist with Standard & Poor's DRI, a consulting firm in Lexington, Mass.

When the economy slows, as it did in the first quarter, firms can't lay off people fast enough to offset the decline in their sales or service activities. At a store, they need to have someone at the cash register, even when ringing up fewer sales. A restaurant needs a dishwasher, though fewer customers are sitting down for dinner.

"When the economy picks up, productivity will bounce right back up again," says Ms. Latta. "This doesn't mean there is no New Economy or all the productivity gains of the last few years have been lost."

Since 1995, productivity increases have more than doubled their 1 percent annual rate from 1973 through 1995.

Previously, the Labor Department had estimated a 0.1 percent decline in productivity in the first three months of the year. But when growth in gross domestic product, the nation's output of goods and services, was revised down by a substantial 0.7 percent in the first quarter, economists figured that the productivity number would also tumble.

Productivity measures the amount of goods and services workers produce per hour. When productivity rises, firms can produce more while holding down costs.

Unit labor costs - one gauge of inflation pressures - soared at a 6.3 percent annual pace in the first quarter after a 4.5 percent advance during the last three months of last year.

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Despite the quarterly drop, a 12-month gauge of productivity is still up by some 2.5 percent. So one quarter's decline in productivity is not expected to have a substantial effect on living standards or on the cost of living. Businesses are still having trouble passing on increases in their wage costs in the form of price increases.

Nonetheless, the productivity numbers may give Federal Reserve policymakers food for thought when considering at their next meeting June 26 whether to drop interest rates further. Rising labor costs are a sign that inflation may be accelerating.

On a more positive note, US retail sales at discount, chain, and department stores rose slightly during the four retail weeks of May, Instinet Research reported in its weekly Redbook Retail Sales Average.

Sales rose 0.6 percent, compared with the same period in April, indicating that consumers have not yet put away their wallets. However, Memorial Day sales were considered "disappointing," and continued unseasonable weather throughout the US hurt early summer sales. There was speculation that weak sales could force stores to mark down unsold goods and cut profit margins in order to clear out their summer goods.

(c) Copyright 2001. The Christian Science Monitor