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Productivity falls for first time since 2008

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Worker productivity dropped this spring for the first time in more than a year, a sign that companies may need to step up hiring if they hope to grow.

Productivity declined at an annual rate of 0.9 percent in the April-to-June quarter after posting large gains throughout 2009, the Labor Department said Tuesday. Unit labor costs edged up 0.2 percent in the second quarter, the first increase since the spring of 2009.

Employee output rose by large amounts during the recession. Companies slashed their payrolls and pushed unemployment up to the highest levels in more than two decades. Economists said a slowing in productivity would be a welcome development if it translates into more hiring.

"Economists often tout the long-run benefits of strong productivity growth, but given the precarious state of the economy, a little more employment, even at the expense of productivity, would likely be helpful in the near term," said Sal Guatieri, senior economist at BMO Capital Markets.

Stock futures fell ahead of the report's release as investors remained cautious while the Federal Reserve met to discuss the slowing recovery and possible stimulus measures.

Productivity for all of 2009 rose 3.5 percent, the best showing in six years and a reflection of companies' ability to produce more with fewer workers.

Output of U.S. workers is the key ingredient to boosting living standards. It allows companies to pay workers more because of the increased production without being forced to raise the cost of their goods, which sparks inflation.

Still, economists contend that the big productivity gains of recent quarters are actually harming the economy's prospects for a sustainable rebound.

They believe companies need to stop slashing their work forces and start rehiring laid off workers. That will boost incomes and give households the support they need to increase consumer spending, which accounts for 70 percent of economic activity.

A slowing in productivity and a rise in unit labor costs will not raise worries about inflation in the current environment because inflation pressures at the moment are nonexistent.

In fact, some analysts believe the bigger threat is the possibility of deflation, a destabilizing bout of falling prices and wages.

The 0.9-percent drop in productivity in the second quarter was the first decline since a 0.1-percent dip in the fourth quarter of 2008. It was the biggest fall since a 1.3- percent decrease in the third quarter of 2008.

The 0.2-percent rise in unit labor costs followed a 3.7-percent plunge in labor costs in the first quarter. It was the first increase since a 0.6-percent rise in the second quarter of last year.

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