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updated: 9/1/2011 8:44 AM

U.S. second-quarter productivity falls

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The productivity of U.S. workers fell more than previously estimated in the second quarter, pushing up labor costs after a record drop in 2010.

The measure of employee output per hour decreased at a 0.7 percent annual rate, the second straight quarterly drop and the biggest since the last three months of 2008, revised figures from the Labor Department showed today in Washington. Expenses per employee climbed at a 3.3 percent rate after a revised 6.2 percent jump in the first three months of the year.

Profits will get squeezed as efficiency falls and costs climb, keeping companies reluctant to step up hiring and delaying a sustained labor-market rebound. The data help explain why a report tomorrow may show payrolls rose by 70,000 last month, down from 117,000 in July, according to the median forecast of economists.

"When productivity declines, you have less support for growth," Jonathan Basile, a senior economist at Credit Suisse in New York, said before the report. "It's going to be harder to increase profits. Companies could cut hours or workers or possibly both."

A separate report from the Labor Department showed applications for unemployment benefits fell last week as the influence of the strike at Verizon Communications Inc. waned, showing the job market is making little headway more than two years after the recession ended.

Jobless claims dropped by 12 to 409,000 in the week ended Aug. 27. Economists surveyed by Bloomberg projected a drop to 410,000, according to the median forecast. The figure remains higher than it was three weeks earlier, before the labor dispute at Verizon pushed the numbers up.

Second-quarter productivity was projected to fall 0.5 percent, according to the median forecast of 47 economists surveyed by Bloomberg News. Estimates ranged from declines of 0.1 percent to 1 percent.

Efficiency in the first quarter decreased at a 0.6 percent pace, marking the first back-to-back drop since the third and fourth quarters of 2008.

Unit labor costs, which are adjusted for efficiency gains, were forecast to rise 2.4 percent, the survey median showed.

Among manufacturers, productivity decreased at a 1.5 percent rate in the second quarter, the biggest decrease since the last three months of 2008.

Compared with the second quarter of 2010, productivity increased 0.7 percent. Labor costs climbed 1.9 percent from the year-earlier period.

The revised jump in labor expenses in the first quarter was the biggest in three years and reflected income revisions issued in last month's report on gross domestic product.

Labor costs dropped 2 percent in 2010, the biggest decrease since data began in 1948.

A lack of productivity gains and stagnant demand is weighing on the job market.

Kelly Services Inc., a provider of temporary staffing services, said its clients are neither scaling back nor planning major increases in near-term hiring.

"It's clear we have hit a soft patch, but the recovery has not ground to a halt," Carl T. Camden, chief executive officer of the Troy, Michigan-based company, said on an Aug. 10 conference call. "Although the recovery is slow and somewhat erratic, we believe it is sustainable."

Gross domestic product expanded at a 1 percent annual pace from April through June, down from a 1.3 percent prior estimate, the Commerce Department reported on Aug. 26. Combined with the 0.4 percent rate in the first three months of this year, the past two quarters were the weakest of the recovery that began in mid 2009.

A few Federal Reserve policy makers favored more aggressive action to stimulate the economy and trim unemployment, according to minutes of their Aug. 9 meeting released this week. They will more fully debate their options when they gather for a two-day meeting this month.