By Shobhana Chandra May 6 (Bloomberg) -- The productivity of U.S. workers rose in the first quarter more than forecast, signaling employers will take time to boost payrolls in order to contain costs. The measure of employee output per hour climbed at a 3.6 percent annual rate, Labor Department figures showed today in Washington. Efficiency advanced 6.3 percent over the past four quarters, the biggest 12-month increase since 1962. Labor costs fell more than projected. Employment may improve as companies such as Timken Co., which slashed payrolls and relied on becoming more efficient to lower expenses and protect profits during the recession, now look to expand as sales improve. The drop in labor costs is also helping limit inflation, giving Federal Reserve policy makers room to keep interest rates near zero. ‘Companies are still using productivity growth and cost- cutting as a major part of their business plan,” said Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc., a New York forecasting firm. “They are still being very slow to bring back people. Labor costs won’t be an issue.” Economists projected productivity would rise at a 2.6 percent annual pace, according to the median of 64 forecasts in a Bloomberg News survey. Estimates ranged from gains of 1.5 percent to 3.9 percent. The Labor Department revised the fourth- quarter gain in efficiency down to a 6.3 percent rate from a previously estimated 6.9 percent. Fewer Claims The number of Americans filing claims for jobless benefits last week dropped to the lowest level in a month, indicating improvement in the labor market is taking time to develop, other figures from the Labor Department showed today. Initial jobless claims fell by 7,000 to 444,000 in the week ended May 1, the third consecutive decrease and in line with the median forecast of economists surveyed by Bloomberg News. The number of people receiving unemployment insurance decreased and those getting extended payments rose. Stock-index futures dropped after the reports as growing concern that the Greece debt crisis will spread through Europe overshadowed the drop in labor costs. The contract on the Standard & Poor’s 500 Index fell 0.3 percent to 1,160.1 at 8:52 a.m. in New York. Treasury securities dropped. The productivity report showed unit labor costs, adjusted for efficiency gains, dropped at a 1.6 percent pace last quarter after a 5.6 percent decrease the previous three months. They were projected to fall 0.7 percent, according to the Bloomberg survey median. Record Plunge For all of 2009, labor costs plunged 1.7 percent, the most since records began six decades ago. Hours worked last quarter increased at a 0.8 percent pace, the most in almost three years. Output rose at a 4.4 percent rate. Among manufacturers, productivity increased at a 2.5 percent pace as hours worked surged 4.9 percent, the most since 1996. Labor costs at factories dropped 6.1 percent from the first quarter of 2009, the biggest decrease since records began in 1988. Having slashed 8.4 million workers from payrolls during the recession that began in December 2007, employers can no longer count on productivity alone to help meet the pickup in demand. The world’s largest economy expanded at a 3.2 percent annual rate last quarter, capping the biggest six-month gain since 2003. Payroll Forecast The Labor Department may report tomorrow that payrolls climbed by 189,000 in April after rising 162,000 in March, according to the survey median. The jobless rate was probably 9.7 percent for the fourth month. High unemployment and modest income growth are taming price pressures. Fed policy makers, who on April 28 reiterated their pledge to hold the benchmark interest rate near zero for an “extended period,” said in a statement that “inflation is likely to be subdued for some time.” Timken, a maker of automotive bearings, reported a gain in first-quarter profit and raised its annual forecast, saying it was in part due to cost-cutting efforts and rising demand. The Canton, Ohio-based company, which shed more than 25 percent of its staff by the end of last year from the start of 2008, is now adding workers. “Our output is higher and our production workforce is leaner,” James Griffith, president and chief executive officer, said on a conference call with analysts on April 29. “With just a modest increase in sales, we are seeing dramatically better productivity. As a result, we’ve been able to translate those sales almost directly to the bottom line.” Griffith also said that Timken has added about 1,000 people, more than half of whom are contingent workers that allow it to remain flexible. To contact the reporter on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net

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