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Thursday morning, the Labor Department released its preliminary report on labor productivity and costs in the fourth quarter of 2009, showing that productivity increased by a little less than expected despite a significant increase in output.
Productivity increased by 6.2 percent in the fourth quarter compared to a downwardly revised 7.2 percent increase in the third quarter. Economists had expected productivity to increase by 6.5 percent compared to the 8.1 percent growth that had been reported for the previous quarter.
Paul Ashworth, Senior U.S. Economist at Capital Economics, said, "In the short-term, the surge in productivity should provide a very strong boost to domestic corporate profits."
"But the corporate sector is already awash with surplus cash flow," he added. "The problem is firms are proving to be unusually reluctant to use those internal funds to finance new investment spending."
Output showed a significant increase in the fourth quarter, surging up by 7.2 percent following a revised 2.2 percent increase in the previous quarter.
However, with productivity a measure of output per hours worked, the jump in output was partly offset by an increase in hours.
The Labor Department said that hours worked edged up by 1.0 percent in the fourth quarter following a revised 4.7 percent decrease in the third quarter. The modest growth marked the first increase in hours worked since the second quarter of 2007.
With the strong productivity growth in the fourth quarter, productivity increased by 5.1 percent over the last four quarters, marking the fastest pace of growth since productivity increased by 6.1 percent from the first quarter of 2001 to the first quarter of 2002
The report also showed that unit labor costs fell by 4.4 percent in the fourth quarter following a revised 1.5 percent drop in the previous quarter. Labor costs had been expected to fall by about 3.5 percent compared to the 2.5 decrease that had been reported for the third quarter.
Ashworth said, "Businesses are sitting on top of their own little domestic savings glut. That reluctance is yet another reason for suspecting that the recovery will ultimately disappoint."
"Since labor is by far the biggest input in the production process, the rapid contraction in unit labor costs suggests that deflation is still a much bigger threat than runaway inflation," he added.
In other economic news, the Labor Department released a separate report showing that first time claims for unemployment benefits unexpectedly showed a modest increase in the week ended January 30th, with the data raising some concerns about the upcoming monthly employment report.
The report showed that initial jobless claims edged up to 480,000 from the previous week's revised figure of 472,000. Economists had been expecting jobless claims to fall to 455,000 from the 470,000 originally reported for the previous week.
Jennifer Lee, Senior Economist at BMO Capital Markets, said, "Employers are still reluctant to hire, and as productivity grew a hefty 6.2% annualized in the fourth quarter of last year, will remain so until evidence of a firm turnaround in economic growth is in train."
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