Worker productivity up at 2.2 percent rate in first quarter

By MARTIN CRUTSINGER AP Economics Writer

WASHINGTON (AP) - Worker productivity rose by a better-than-expected amount in the first three months of the year while labor cost pressures eased.

The Labor Department reported Wednesday that productivity, the amount of output per hour of work, increased at an annual rate of 2.2 percent in the first quarter. That was slightly higher than the 1.5 percent increase that had been expected.

In a sign that inflation could be easing, labor cost pressures slowed a bit. Unit labor costs rose at an annual rate of 2.2 percent, down from a 2.8 percent rise in the final three months of last year.

While rising wages and benefits are good for employees, those increases can lead to higher inflation if businesses are forced to boost the cost of their products to cover the higher payroll costs.

However, if productivity is increasing, it allows businesses to finance higher wages out of the increased output.

The Federal Reserve, always on guard about the threat of inflation, closely monitors developments in productivity since wage pressures are often the main way inflation gets out of control.

The Fed last week boosted a key interest rate for the seventh time since September, but the increase was a smaller quarter-point move and the Fed signaled that it may pause its rate cutting campaign in part because of concerns about inflation.

Analysts read the bigger-than-expected rise in productivity and the smaller increase in unit labor costs as a good sign that inflation pressures, at least on the labor front, are remaining under control and the country is not facing the danger of a wage-price spiral.

"There is certainly nothing to worry about here from a cost-push inflation perspective," said Ian Shepherdson, chief U.S. economist at High Frequency Economics.

On Wall Street, stocks tumbled Wednesday as investors grew concerned about what the relentless rise in oil prices may do to economic growth. Oil climbed to a record near $124 per barrel. The Dow Jones industrial average fell 206.48 points to close at 12,814.35.

Many analysts think the country has already toppled into a recession. But overall economic growth, as measured by the gross domestic product, eked out a tiny 0.6 percent rate of increase in the first three months of the year, the same anemic pace as the final three months of last year.

Treasury Secretary Henry Paulson, in an interview with The Associated Press, said the rise in gasoline prices would blunt to some extent the boost the administration is hoping the economy will receive from the 130 million economic stimulus payments that are being sent out currently.

"Obviously, the high price of gasoline is unwelcome and is a challenge and is a headwind," Paulson said, while still predicting that the stimulus payments will help economic growth to pick up in the second half of this year.

In other economic news, the Federal Reserve said consumer borrowing shot up at an annual rate of 7.2 percent in March, the fastest gain in four months and about double what had been expected. However, the big increase was seen as a sign that consumers are being forced to borrow more because of the weak economy.

"This represents distressed borrowing. Consumers need cash and they have turned back to their credit cards to fill the void left by lost jobs and weaker incomes," said Mark Zandi, chief economist at Moody's Economy.com.

The rise in productivity in the year's first three months occurred as the number of hours worked declined at an annual rate of 1.8 percent.

That reflected layoffs that have occurred as businesses cut back on their payrolls in the face of an economic slowdown triggered by a steep slump in housing and a severe credit crunch that has resulted in billions of dollars of losses from financial firms.

The 2.2 percent rate of productivity growth in the first quarter was up slightly from a 1.8 percent increase in the fourth quarter of last year.

Productivity for all of 2007 rose by 1.8 percent, up a bit from the 1 percent gain in 2006. However, both of those increases were far below growth levels of the past decade as productivity experienced a healthy rebound, reflecting all the investments made in productivity-enhancing equipment such as computers.