U.S. firms reduced their workforce drastically in the fourth quarter, but the cuts weren't deep enough to match the drop in output, the government said Thursday.
Productivity in the nonfarm business sector - output per hour worked - fell at an annual rate of 0.4% in the quarter as output fell 8.7% annualized while hours worked fell 8.3% annualized. Output fell at the fastest pace since 1982, while hours worked fell the most since 1975.
A month ago, the Labor Department estimated productivity increased at a 3.2% annual rate, but recent revisions to the gross domestic product accounts led to a significant downward revision.
Productivity typically slumps when the economy slows, as firms retain too many workers for the amount of work needed to be done. Ultimately, firms match their payroll count to demand for their products.
In the manufacturing sector, productivity fell a record 4%. Hours worked plunged a record 14.25% while output dropped a record 17.7%.
Unit labor costs in the nonfarm business sector increased 5.7%, the most in two years. Real hourly compensation (adjusted for inflation) increased a record 15.9% at an annual rate as consumer prices fell sharply. Real compensation fell 0.1% for the entire year.
The report was slightly worse than expected. Economists surveyed by MarketWatch forecast 0% productivity growth and a 5% rise in unit labor costs.
For all of 2008, productivity increased 2.8%, the biggest increase since 2003. Unit labor costs rose 0.9% in 2008 and real compensation fell 0.1%.
Productivity, a concept that's simple in theory but elusive in practice, is output divided by hours worked. Productivity gains are the key to higher living standards, higher wages, increased profits and low inflation.
High productivity growth means the economy can grow rapidly without inflation, raising living standards and theoretically allowing workers to get big raises without hurting the boss's profits.
But a low rate of productivity growth can mean a sluggish economy and increased inflationary pressures.
Unfortunately for those who want easy answers, in practice productivity is extremely difficult to measure, especially in financial services where the concept of a "unit" of output is murky.
That's why the Federal Reserve and other policymakers pay especially close attention to nonfinancial productivity. In the third quarter, nonfinancial productivity increased 3.9% annualized, nearly double the 2.2% increase in the nonfarm business sector.
Most economists focus on the longer trend, rather than on the volatile quarterly numbers.
Productivity averaged about 2.7% annually from 1948 to 1970, then slowed to 1.6% from 1971 to 1995. Since then, productivity has grown about 2.5% annually. In 2007, productivity increased 1.4%.
