Analysts Hope Productivity Increase Can Stem Job Cuts, Lead to Increased Corporate Profits

By Jason Simpkins
Managing Editor
Money Morning

Worker productivity rose in the first quarter, as companies cut costs by shedding workers and extracted more output from remaining employees. Analysts are hopeful that the increased efficiency will help slow rate of job cuts, which also appear to be easing from their formerly torrid pace.

Productivity, a measure of worker output by the hour, rose at a revised 1.6% annual rate in the first quarter, the U.S. Labor Department reported today (Thursday). That's double the 0.8% estimated last month and a vast improvement over a 0.6% drop in the fourth quarter of 2008.

The gain in productivity was largely the result of job cuts and fewer hours worked by employees. U.S. employers have already shed 5.7 million jobs since the recession began in December 2007. Hours worked by employees plunged at a 9% annual rate in the first quarter, according to the Labor Department report.

The tighter payrolls and increased productivity led to a jump in corporate profits, which surged 3.4% in the first quarter from the previous three months – the first gain in almost two years. And now that businesses have found away to boost their productivity and widen their profit margins, analysts are hopeful that the labor market will stabilize.

"Businesses are far advanced in their objective of cutting jobs and controlling labor costs," John Herrmann, chief economist at Herrmann Forecasting LLC, told Bloomberg News. "That suggests that the pace of job cuts should slow materially."

A separate report from the Labor Department today showed fewer workers filed new claims for jobless benefits for the third straight week. Initial claims for unemployment benefits fell to 621,000 in the week ended May 30, a decrease of 4,000.

The data also showed that continuing claims – the number of people staying on benefit rolls – fell by 15,000 to 6.74 million in the week ended May 23, the first decline in 17 weeks.

Still, jobless claims remain historically high, as does the unemployment rate, which stood at 8.6% in April. U.S. Federal Reserve Chairman Ben S. Bernanke said earlier this week that unemployment is likely to increase, and a report tomorrow (Friday) may show that the unemployment rate climbed to a 25-year high of 9.2%, Bloomberg reported.

"The downshift in claims continues but progress is painfully slow and claims at their current level are still consistent with massive declines in payrolls," Ian C. Shepherdson, chief U.S. economist of High Frequency Economics, told the AFP.

Shepherdson doesn't expect jobless claims to reach the 450,000 level until next year.

"Feeble green shoots don't stop companies laying off staff, still less actually [start] to hire again," he said.

News and Related Story Links:

• AFP:
  New US jobless claims dip for third week

• Bloomberg:
  U.S. First-Quarter Productivity Rises 1.6%; Labor Costs Up 3%

• Money Morning:
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