WASHINGTON -- Productivity climbed at a slower-than-expected pace in the second quarter as the highest year-on-year jump in U.S. labor costs in seven years restrained its growth and kept inflation worries alive.
The wage pressures were expected tokeep the Federal Reserve focused on inflation, and not the slackening economy, as its policy committee met in its regular meeting Tuesday.
The Labor Department earlier in the day reported that productivity, the gauge of how much any given worker can produce in an hour, rose at a 1.8 percent annualized pace in the second quarter.
That was somewhat slower than Wall Street economists had expected and came on the heels of just a 0.7 percent advance at the start of this year as the economy nearly stalled.
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Unit labor costs, watched closely by the Fed as a key measure of inflation and profit pressures, grew at a 2.1 percent pace in the second quarter.
While that marked a slowdown from a 3 percent first-quarter advance, some analysts said it was still fast enough to present an inflation concern. More importantly, unit labor costs are up 4.5 percent from a year ago, the biggest rise in seven years.
"This productivity report definitely confirms the inflation fears of the Fed," said Harm Bandholz, an economist for UniCredit Markets and Investment banking in New York.
Bond markets initially were little changed after the data as investors awaited a Fed statement in the afternoon on the results of its policy meeting. The market was particularly anxious for any clues on the impact of deteriorating credit availability caused by staggering losses on subprime housing loans.
The sluggish productivity growth and higher labor costs tempered any expectations that the central bank would cut interest rates soon to help pump liquidity into jittery financial markets and ward off troubles from a battered housing sector.
U.S. stocks were also little changed in early afternoon trade.
SOFT PRODUCTIVITY TREND
Many economists said the productivity data bolstered their view that Fed policy-makers would hold to their prior stance that inflation is the biggest risk to the economy and leave rates as they now stand..
"The report does show that productivity improved in the second quarter, but still is growing only modestly and labor costs are still growing — probably at the high end of the Fed's comfort zone," said Gary Thayer, chief U.S. economist at A.G. Edwards and Sons in St. Louis.
The Labor Department took into account recent downward revisions to the government's measure of U.S. economic growth for the past years, and adjusted its productivity measures downward, as well.
Over the past 12 months, nonfarm productivity has grown only 0.6 percent in a sluggish trend stretching over four years.
"It will take a longer period of sluggish growth to unwind inflation pressures," said Scott Anderson, senior economist at Wells Fargo.
While some economists worry the long-term trend of U.S. productivity growth has moved lower, others argue a slowdown is typical during this stage of the business cycle.
"We should not forget that we are nearly six years into the current expansion. That is a long time and productivity tends to slow as the expansion wears on," said Joel Naroff of Naroff Economic Advisors in Holland, Pennsylvania.
The underlying pace of productivity growth shapes the economy's long-term growth potential, the rate at which the economy can grow without sparking price pressures.
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