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Productivity slows in 1st quarter

Report hints inflation being held in check

A California highway department worker carries a cable cutter as he works on the collapsed freeway in Oakland. The Labor Department said output per hour of work slowed to an annual rate of 1.7 percent. (Paul Sakuma/Associated Press)

WASHINGTON -- The growth in worker productivity slowed in the first three months of this year but so did wages, providing evidence yesterday that a slowing economy is holding down inflation.

The Labor Department reported that productivity, the amount of output per hour of work, rose at an annual rate of 1.7 percent in the January-to-March quarter, down from a 2.1 percent rise in the final three months of last year.

Wages slowed even more sharply with unit labor costs rising at a 0.6 percent rate, compared with a 6.2 percent surge in the final three months of 2006 when year-end bonuses for high-income workers inflated the number.

The increase in productivity was slightly better than expected, while the slowdown in unit labor costs was much steeper than economists anticipated.

While rising wages are good for workers, the Fed becomes worried if wage pressures outstrip productivity gains, which can send inflation higher.

"Passable productivity and benign labor costs hold out hope that firms can keep costs and inflation under control," said Joel Naroff, chief economist at Naroff Economic Advisors.

Also yesterday, the Institute for Supply Management said the service sector, where 80 percent of Americans work, expanded at a faster rate in April than the previous month with its index rising to 56 from 52.4 in March.