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Productivity slows, costs rise

Workers level concrete on a Chicago highway. Worker productivity, a gauge of employee efficiency, rose at an anual rate of just 1 percent in the first quarter. (Rex Arbogast/Associated Press)

WASHINGTON -- US worker productivity grew less last quarter than the government initially estimated and labor costs climbed, giving the Federal Reserve reason to remain concerned about inflation.

Productivity, a gauge of employee efficiency, rose at an annual rate of 1 percent, down from the 1.7 percent pace reported last month, the Labor Department said yesterday. Labor costs increased 1.8 percent, three times the prior estimate.

The rise in labor expenses, which account for about two-thirds of the cost of producing a good or service, heighten the likelihood that companies will push up prices, economists said. The figures, along with signs that growth is recovering, make it even less likely that policy makers will lower interest rates.

"There are inflationary pressures coming from the labor market," said Julia Coronado, a senior economist at Barclays Capital Inc., in New York, who correctly forecast the gain in labor costs. "Along with the downward drift in productivity, this will be a concern for the Fed."

Economists had forecast a 1 percent rate of increase in first-quarter productivity, according to the median of 70 forecasts in a Bloomberg News survey. Unit labor costs, which are adjusted for efficiency gains, were projected to rise at a 1.3 percent pace.

With yesterday's report, Labor also revised figures for the fourth quarter that reflected, in part, last week's update on gross domestic product and personal income. Productivity rose at an annual rate of 2.1 percent in the fourth quarter, the same as previously estimated. Labor costs jumped 8.9 percent in the last three months of 2006, up from 6.2 percent.

Hours worked fell at a 0.4 percent pace last quarter, the biggest drop in almost four years, compared with a 0.3 percent decline initially reported and a 0.8 percent gain the previous three months. Output rose at a 0.6 percent rate last quarter, the smallest increase since the last three months of 2002.

Among manufacturers, productivity rose at a 2.4 percent rate in the first quarter, after increasing at a 1.9 percent rate the prior three months. Productivity at nonfinancial corporations, a measure watched by the Fed, rose at a 0.6 percent rate.