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Productivity drops at rate of 0.2 percent in fourth quarter

| Friday, Feb. 7, 2003

WASHINGTON (AP) — The productivity of U.S. companies dipped at an annual rate of 0.2 percent in the final quarter of 2002, the worst showing in more than a year, as the nation's economic recovery faltered.

The decline came after productivity — the amount of output per hour of work — went up by a strong 5.5 percent annual rate in the third quarter, the Labor Department reported Thursday.

The fourth quarter's performance — weaker than the 0.7 percent rise economists were predicting — marked the biggest decline in productivity since the first quarter of 2001, when the economy was heading into its first recession in a decade.

Still, even with the fourth-quarter decline, productivity for all of 2002 grew by a stellar 4.7 percent, the strongest showing since 1950, and a marked improvement over the 1.1 percent increased posted in 2001. Economists called 2002's performance impressive.

Analysts were predicting a slowdown in productivity growth in the fourth quarter because the economy shifted into a lower gear during the period. The economy grew at a rate of just 0.7 percent in the fourth quarter, a big slowdown form the brisk 4 percent rate registered in the third quarter.

"We had a rollercoaster year in the economy and productivity followed closely," said Joel Naroff of Naroff Economic Advisers. "With minimal growth during the fourth quarter, it would have been difficult for businesses to adjust rapidly and they didn't."

Naroff predicted productivity would rebound in the current quarter.

In a second report from the department, new claims for unemployment benefits fell last week by a seasonally adjusted 11,000 to 391,000. That marked a turnaround from the previous week when claims rose by 19,000.

The more stable, four-week moving average of claims, which smooths out weekly fluctuations, last week dipped slightly to 384,750, the lowest level in more than two months.

While the latest jobless claims figures suggested that the pace of layoffs may be stabilizing, the job market, nonetheless, remains sluggish.

Economists believe the nation's unemployment rate probably remained stuck at 6 percent in January, even as the economy added around 69,000 jobs during the month. Such job growth would mark an improvement over December when payrolls were cut by 101,000, but still would be considered below normal. The government will release January's employment report today.

Businesses, facing economic uncertainties, including a possible war with Iraq, have been wary of making big commitments in hiring and in capital spending.

The decline in productivity in the fourth quarter pushed up unit labor costs at a rate of 4.8 percent, the biggest increase since the third quarter of 2000. That's discouraging for companies trying to keep a lid on costs. In the third quarter, unit labor costs dipped at a rate of 0.1 percent.

Workers didn't fare as well in the fourth quarter from the previous quarter. Hourly compensation adjusted for inflation rose at a rate of 2.2 percent in the fourth quarter, down from a 3.4 percent advance in the third quarter.

Federal Reserve Chairman Alan Greenspan and his colleagues have said they are optimistic about the long-term prospects of productivity growth, a key ingredient to the economy's long-term vitality.

Gains in productivity are a crucial ingredient to the economy's long-term vitality. Healthy productivity increases allow the economy to grow faster without triggering inflation. Businesses are able to pay workers more without raising prices, which would eat up those wage gains.

The Fed last week kept a key interest rate at a 41-year low, with the hope that will spur consumers and businesses to spend and invest more, helping the economy.

President Bush has offered a big package of tax cuts to energize the economy. Democrats have their own proposals.

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