With a notable increase in hours worked more than offsetting a modest increase in output, the Labor Department released a report on Thursday showing a bigger than expected drop in U.S. labor productivity in the fourth quarter of 2012.
The report said labor productivity fell by 2.0 percent in the fourth quarter following a revised 3.2 percent increase in the third quarter. Economists had expected productivity to drop by 1.3 percent compared to the 2.9 percent increase that had been reported for the previous quarter.
The bigger than expected drop in productivity, which is a measure of output per hour, was due in large part to a 2.2 percent increase in hours worked. Hours worked rose by 1.5 percent in the third quarter.
The notable increase in hours worked in the fourth quarter more than offset a 0.1 percent increase in output, which followed a 4.7 percent jump in the previous quarter.
With the drop in productivity in the fourth quarter, the annual rate of productivity growth slowed to 0.6 percent from 1.8 percent in the third quarter.
Paul Ashworth, Chief U.S. Economist at Capital Economics, said, "The slowdown in productivity growth will put some downward pressure on corporate profits margins, which are currently close to record highs."
"That's another reason to suspect that stock markets could have a more disappointing time in the second half of this year," he added.
At the same time, the Labor Department said unit labor costs surged up by 4.5 percent in the fourth quarter after falling by 2.3 percent in the third quarter. Labor costs had been expected to increase by about 3.1 percent.
The increase in labor costs was partly due to an increase in hourly compensation, which rose by 2.4 percent in the fourth quarter after edging up by 0.8 percent in the third quarter.
The acceleration of bonus payments and other special payouts ahead of the year-end tax increases also contributed to the increase in labor costs.
"On the face of it, it took a lot of hours to produce less stuff than before, which means the average labor cost increased," said Chris Low, chief economist at FTN Financial. "The reality is likely that hours were over-reported in the employment report, or GDP was not as weak."
Meanwhile, real hourly compensation, which is adjusted for inflation, inched up by 0.3 percent in the fourth quarter following a 1.5 percent drop in the previous quarter.
by RTT Staff Writer
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