Productivity dip stirs inflation fears

WASHINGTON The productivity of U.S. firms slackened in thesecond quarter, the Labor Department said Wednesday in a report thatfanned fears about inflation.

Productivity, a measure of output per worker hour, fell 0.1percent for companies outside the agricultural sector in the threemonths ended June 30. The drop followed an advance of 1.8 percent inthe first quarter.

"The underlying trends are not favorable," said CharlesLieberman, chief economist at Chase Securities Inc. "The numbers jumparound a lot, but if you take a number of quarters together, theunderlying . . . growth rate of productivity appears to be slowing,which is normal for the mature stage of the economic expansion."

While declining overall, productivity rose in the key factorysector during the second quarter. It climbed 1.5 percent, a solidgain, but the smallest one in three years for an area of the economywhere productivity has been booming.

In the first quarter, manufacturing productivity rose at a 5.6percent annual rate.

The total decline in productivity was not as steep as manyeconomists had expected. In a Reuters survey, Wall Street analystshad forecast a drop of 0.7 percent in the second quarter.

The department, however, revised downward the gain inproductivity for the first quarter, which it previously said rose ata seasonally adjusted annual rate of 2.1 percent.

"We seem to be on a trend of annual gains of 1 percent or lessin productivity," said Lynn Reaser, chief economist at Barnett BanksInc. in Jacksonville, Fla.

Reaser said that rather meager productivity gains could be asource of higher inflation. That is because slower productivitylimits the extent that businesses can boost output without incurringhigher costs.

Indeed, unit-labor costs, which make up two-thirds ofbusinesses' production costs, surged in the second quarter. Theyposted a 3.8 percent gain on a seasonally adjusted annualized basisafter a rather tame increase of 1.5 percent in the first quarter.

After economic growth during the second quarter came in at abrisk 4.2 percent, Federal Reserve policy makers have been closelywatching data on productivity and labor costs closely.