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Efficiency up just 2.7%

Worker productivity grows at the slowest rate since 2001

SHARE Efficiency up just 2.7%

Associated Press

WASHINGTON — The efficiency of U.S. workers increased in 2005 at the slowest rate since the recession year of 2001 while an important gauge of wage pressures rose at the fastest pace in five years, the government reported Thursday.

The Labor Department said productivity rose by 2.7 percent last year while labor costs rose by 2.4 percent, the biggest jump since a 4.2 percent increase in 2000. For just the final three months of the year, productivity actually fell by 0.6 percent, the first decline since early 2001, and labor costs rose by 3.5 percent.

The combination of slowing productivity — the amount of output per hour of work — and rising labor costs was certain to attract attention at the Federal Reserve. The central bank is worried that rising wage demands could trigger inflation problems down the road.

"The glory days of surging productivity that kept labor costs down look to be behind us," said Joel Naroff, chief economist at Naroff Economic Advisors. "The expected slowdown in productivity has arrived, and that is putting pressure on costs and the Fed."

On Wall Street, investors worried that the jump in labor costs was a sign that inflation might be heating up. The Dow Jones industrial average fell 101.97 points to close at 10,851.98 on Thursday.

Separately, chain retail stores reported strong results in January as milder-than-normal weather lured consumers out to the malls to spend the gift cards they received in December.

Winners included Wal-Mart Stores Inc., wholesale club operators such as Costco Wholesale Corp. and teen retailers including Bebe Stores Inc. Analysts said merchants were benefiting from a mild January in the Northeast and Midwest and continued improvements in the labor market.

In other economic news, the government said the number of people filing for unemployment benefits dropped to 273,000 last week, a decline of 11,000 from the previous week.

Claims have been below 300,000 for four out of the past five weeks, an improvement that pushed the four-week moving average for claims down to 283,500 last week, the lowest level in 5 1/2 years.

Analysts said the improvement in jobless claims so far this year could be signaling a significant strengthening in the labor market, meaning fewer layoffs and more job creation by U.S. companies.

Economists believe that the economy created around 250,000 jobs in January, which would be a sharp pickup from the 108,000 jobs created in December.

Analysts are expecting the January unemployment rate will be unchanged from December's low 4.9 percent. The government was releasing the January unemployment report today.

The Fed boosted interest rates for a 14th time on Tuesday. Many economists are looking for at least one more rate increase on March 28 as the central bank tries to make sure that tighter labor markets do not trigger rising wage pressures that could push inflation higher.

The Fed's concerns were likely to be increased by the report on the productivity of nonfarm workers. Analysts said that even with the slowdown in productivity growth for all of 2005, it was still slightly above the average for the past 50 years and was more than double the weak growth rates turned in during the 1970s and 1980s.

Since the mid-1990s productivity has accelerated as the economy benefited from the growing use of high-tech tools such as computers and the Internet.