Ahead of the Bell: Productivity

WASHINGTON (AP) - Productivity likely grew at a slower pace in the first three months of this year than first estimated.

Economists surveyed by Thomson Reuters expect productivity grew at an annual rate of 3.4 percent in the first three months of this year. The Labor Department will issue the report at 8:30 a.m. EDT Thursday.

A growth rate of 3.4 percent for productivity, the amount of output per hour of work, would be below slightly slower than the 3.6 percent estimate initially reported a month ago.

That slight drop would reflect the fact that the government revised its estimate of total output - the gross domestic product - down slightly to 3 percent from an initial estimate of 3.2 percent. With less output during the quarter, the expectation is that productivity will be slightly lower as well.

Economists surveyed by Thomson Reuters are looking for unit labor costs to fall at an annual rate of 1.4 percent in the January-March period, slightly less than the 1.6 percent first estimated.

For all of 2009, productivity rose at a 3.7 percent rate, nearly double the 2 percent increase in 2008. It was the fastest annual increase in productivity in seven years.

The strong gains in productivity and falling unit labor costs have kept a lid on overall inflation. That has given the Federal Reserve leeway to keep a key interest rate at a record low level for 18 months. Many economists believe the Fed will keep rates low through the rest of this year, given the absence of inflationary pressures.

Economists believe productivity gains will slow somewhat in coming quarters, however. They think that companies are reaching the outer limits on how much work they can squeeze from leaner staffs. That would actually be a benefit for the economy because it would mean hiring will increase in coming months.

Analysts believe that hiring has to show stronger gains to boost household incomes and keep consumer spending growing at a healthy pace. Consumer spending is critical for a sustained economic recovery because it accounts for 70 percent of total economic activity.