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Tuesday, 8 May, 2001, 15:05 GMT 16:05 UK
US productivity falls
Workers at Dell Computers
The slowdown is starting to bite in US factories
US productivity, a key measure of future economic health, has fallen for the first time in six years.

The 0.1% fall in productivity for the three months to March surprised analysts, who were expecting a 1% increase.

The Federal Reserve's fears of higher labour costs in relation to productivity are coming to pass

Paul Kasriel, chief economist, Northern Trust

The figures, released on Tuesday, will add to pressure for a further cut in interest rates to stave off a recession.

Productivity - the amount of output per hour of work - is the key to increasing living standards.

If productivity is rising it allows wages to increase without triggering higher inflation, which would eat up wage gains.

However, if productivity falters, pressures for higher wages could force companies to raise prices, triggering inflation.

Market reaction

The US stock markets, which might have been expected to fall on Tuesday's news, showed a mixed reaction in early trading.

The Dow Jones industrial average lost 40 points but the tech-heavy Nasdaq index gained 18 points.

The productivity decrease followed a 2% annual rate of growth in the fourth quarter of last year.

The Labor Department report also showed that unit labour costs jumped by a 5.2% rate in the first quarter, the biggest increase since the fourth quarter of 1997, when they rose at a 5.5% rate.

Paul Kasriel, chief economist at Northern Trust, said: "This report suggests that productivity is not as miraculous as some had thought.

"And the Federal Reserve's fears of higher labour costs in relation to productivity are coming to pass."

Greenspan view

The 0.1% decline in productivity marked the first since a 0.8% rate of decrease in the first quarter of 1995.

Federal Reserve Chairman Alan Greenspan, in a speech last month, said productivity would probably moderate because of the weaker economy, but that the lull should be only temporary.

Mr Greenspan said he still believed that massive investments in computers and other high-tech equipment in recent years had permanently improved the outlook for productivity.

Between 1973 and 1995, productivity in the US showed lacklustre gains of just above 1% per year.

However, since 1995 increases have more than doubled, allowing companies to pay workers higher salaries without raising the prices of their products.

The BBC's Patrick O' Connell
"Productivity has been the cornerstone of the 10 year US expansion"

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See also:

03 May 01 | Business
US service sector weakens
04 May 01 | Business
Shock rise in US jobless
06 Mar 01 | Business
US productivity slips
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