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Tuesday, 5 June, 2001, 14:54 GMT 15:54 UK
Sharp drop in US productivity

US workers were less productive in the first quarter
The productivity of US workers, a key measure of rising living standards, fell at an annual rate of 1.2% in the first quarter of 2001 - a much bigger fall than last month's government estimate.

It was the biggest drop in eight years.

The downward revision in productivity - the amount of output per hour of work - released by the US Labour Department on Tuesday reflects the weakened state of the US economy.

The US government had previously estimated that productivity in the January-March quarter dipped at a rate of just 0.1%.

Factory orders down

New figures also show US factory order slumped sharply in April.

The economy was hit by weaker demand for new cars, computers and the primary metals used by the nation's floundering manufacturing sector, according to a report by the Commerce Department.

The value of factory orders plunged 3% to a seasonally adjusted $336.94bn in April, the first decline since January - steeper than the 2.8% drop forecast by Wall Street economists.

The figures suggest there will be a slow start to the second quarter as output declines in the face of fewer orders.

New orders for transportation equipment - the largest single category of factory-made products - fell 9.6% to $52.57bn after rising 17.4% in March.

Orders for computers and electronic equipment decreased 10.3% in April to $36.17bn after being down 4.6% in March, reflecting less investment by companies in high-tech products that are used for boosting productivity.

Service sector slump

Another key economic indicator released on Tuesday showed the US slowdown was continuing to spread into the previously resilient service sector.

The National Association of Purchasing Management (NAPM) on Tuesday said its monthly non-manufacturing index fell to 46.6 in May, its lowest reading in the survey's four-year history and its second straight month below 50.

The index read 47.1 in April; economists had expected the gauge to rise to 47.8.

A number below 50 indicates contracting economic activity in services, made up of key sectors such as transportation, legal services, real estate and business services.

The survey's employment index edged down to 46.6 in May from 46.7 in April, the third straight month the survey has suggested job losses in the service sector.

On Friday the US government said US employment contracted for a second straight month in May as firms shed 19,000 jobs.

Pressure on inflation

The 1.2% drop in productivity is potentially the most worrying figure for the economy, as it is linked to inflationary pressure.

The pace of productivity we've seen in the last few years is not going to be sustained entirely...but I don't think it's terribly worrisome

Anthony Karydakis, senior financial economist at Banc One Capital Markets
It was a bigger drop than analysts had predicted - and the largest since the first quarter of 1993, when productivity fell at a rate of 5%.

Gains in productivity allow wages to increase without triggering inflation that would eat up wage gains.

If productivity falters, however, pressures for higher wages could force companies to raise prices, thus worsening inflation.

Labour costs

The drop in productivity also boosted unit labour costs by an annual rate of 6.3% in the first quarter, the biggest increase since the fourth quarter of 1990 and faster than many analysts expected, according to revised figures.

That government previously estimated labour costs rose at a 5.2% rate in the first quarter.

The slew of gloomy figures a by-product of a slowing economy, which grew at an annual rate of 1.3% in the first quarter, far more slowly than the 2% rate the government previously estimated.

Analysts' reaction

However, analysts - and the markets - were unmoved.

Anthony Karydakis, senior financial economist at Banc One Capital Markets, said the data "clearly suggests that the pace of productivity we've seen in the last few years is not going to be sustained entirely.

"But I don't think it's terribly worrisome.

"We knew we were going to have a big downward revision because first-quarter GDP was revised downward.

"The jump in unit labor costs definitely didn't come as a surprise."

The Dow Jones Industrial Average opened up slightly in early trade, gaining 18 points to 11079 at 1433GMT, as positive corporate news offset worries about productivity.

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See also:

01 Jun 01 | Business
Mixed picture of US economy
14 May 01 | Business
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US productivity slips
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