Productivity grows at 2.5 percent rate in spring, slowest pace since late 2002

WASHINGTON (AP) - Workers' productivity increased at an annual rate of 2.5 percent in the spring, the smallest gain since late 2002, reflecting the economy's slowdown.

The increase in productivity - the amount an employee produces for every hour on the job - was down from an initial estimate of a 2.9 percent growth rate for the April-to-June quarter and marked a deceleration from the 3.7 percent pace posted in the first three months of this year, the Labor Department reported Thursday.

The new reading on second-quarter productivity was slower than the 2.8 percent pace some analysts were forecasting.

"Although productivity is slower than it has been, it is still in good shape," said Clifford Waldman, economist at Manufacturers Alliance/MAPI, a research group.

A major factor restraining the increase in productivity in the second quarter was a big slowdown in overall production. Gross domestic product, which measures the value of all goods and services produced within the United States, rose at an annual rate of 2.8 percent in the second quarter, compared with a 4.5 percent growth rate in the first quarter.

In other economic news:

- The start of the back-to-school shopping season was a disappointment for major retailers. Wal-Mart Stores Inc., Limited Brands, Talbots Inc. and Costco Wholesale Corp. were among the companies issuing reports of sluggish sales for August.

- New claims for unemployment benefits rose for the second week in a row, reflecting the lingering impact of Hurricane Charley, the Labor Department said. For the week ending Aug. 28, new applications increased by a seasonally adjusted 19,000 to 362,000. A little less than half of the rise was blamed on the storm, which ripped through Florida on Aug. 13, a government analyst said.

- Orders to U.S. factories grew by 1.3 percent in July, following a 1.2 percent advance in June. The increase in July was led by a big jump in demand for commercial aircraft and parts. Orders for "nondurable" goods, such as food products and chemicals, went up 1 percent in July for the second straight month.

In financial markets, the Dow Jones industrials were up 9 points and the Nasdaq was up 4 points in the late morning Thursday.

On the layoffs front, jobless claims for the week ending Aug. 21, climbed by 10,000 - about half of that was attributed to the hurricane.

Hurricane-related claims showed up in the weeks after the storm as people were able to get out to employment offices to file applications for benefits.

The impact of the storm makes it difficult to divine underlying trends in the health of the labor market, whose recovery has been slow and uneven.

President Bush and his Democratic rival, John Kerry, have sparred frequently over the economy and the availability of jobs. The economy has lost 1.1 million jobs since Bush took office.

The president says making his tax cuts permanent will strengthen the economy and spur more job creation. Kerry contends the tax cuts have mainly benefited the wealthy, have squeezed the middle class, haven't produced significant job growth and plunged the government's balance sheets deeper in red ink.

In the productivity report, the 2.5 percent growth rate was the smallest since a 1.6 percent pace registered in the final quarter of 2002.

Unit labor costs, which are closely watched by the Federal Reserve for signs of inflationary pressures, rose at an annual rate of 1.8 percent in the second quarter.

While that was down slightly from a previous estimate for the second quarter, it still marked the biggest rise in two years. Unit labor costs is a measure of how much companies pay workers for every unit of output they produce.

Wanting to make sure inflation doesn't become a problem for the economy, the Federal Reserve has raised short-term interest rates twice this year, leaving a key rate at 1.50 percent. Economists believe rates may go up for a third time at the Fed's next meeting on Sept. 21.

Efficiency gains are important to the economy's long-term vitality. They allow the economy to grow faster without igniting inflation. Companies can pay workers more without raising prices, which would eat up those wage gains.

During the economic slump, however, gains in productivity came at the expense of workers. Companies produced more with fewer employees.

Job growth has been lackluster, but economists are hoping it improved in August. Analysts are forecasting a net jobs gain of around 150,000, up from a measly 32,000 in July. The employment report for August is released Friday.