Workers Get More Done In 1st quarter
"This increases the likelihood the Federal Reserve will leave interest rates unchanged until the fall," says Peter Morici, business professor at the University of Maryland.
Better productivity allows wages to rise without boosting inflation, which the Fed seeks to control by raising interest rates.
David Rosenberg, North American economist at Merrill Lynch, warned, however, that productivity growth could still be in the midst of a cyclical slowdown.
The Fed, which has held interest rates steady at 5.25 percent since June, meets on Wednesday.
Productivity, a measure of output per worker, rose at a 1.7 percent annual rate in the first three months of 2007. The quarterly growth was about twice as fast as economists predicted but below the 2.1 percent pace of the previous quarter.
Overall, productivity has slowed since surging in the mid-'90s, leading economists to debate whether the decline is temporary or long-lasting.
Higher productivity is vital to the economy, letting companies produce more efficiently and profitably, while raising overall incomes and living standards.
"The slowdown in productivity growth is somewhat cyclical," says Mark Vitner, senior economist at Wachovia, saying the number is holding up pretty well at a time when the slowing housing market is hurting business.
"I don't think the strength of productivity growth we saw in the '90s is gone," adds Vitner, who expects improvement in the second half of the year.
The productivity report showed unit labor costs fell sharply from a 6.2 percent annual pace at the end of 2006 to a 0.6 percent rate in the first quarter of 2007.
But some economists called the figures misleading because of a change in the Labor Department's timing in booking bonus payments.
Mike Englund, chief economist of Action Economics, says labor cost increases are probably averaging a 3 percent pace. Still, he says, the fact that productivity came in better than expected is good news, showing the economy has more capacity to grow without fueling inflation.
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