Productivity grew 3.6 percent in first quarter

Productivity growth posted a better-than-expected gain in the first three months of the year while labor costs dropped more
than expected. That combination is good for corporate profits but means household incomes continue to be squeezed, putting
the economic recovery at risk.

The Labor Department said Thursday that productivity grew at an annual rate of 3.6 percent in the first quarter. That was
better than the 2.5-percent increase economists had expected.

Unit labor costs dropped at an annual rate of 1.6 percent, a bigger decline than the 0.7 percent forecast. It marked the
third straight quarterly decline, underscoring how much a severe recession has dampened wage pressures.

A second report Thursday showed the job market is slowly improving. The Labor Department said applications for unemployment
benefits dropped for a third straight week, decreasing by 7,000, to 444,000.

Economists believe the April jobless number, which is to be released Friday, will show unemployment stuck at 9.7 percent
for a fourth straight month.

The economy has been growing since last summer, but firms have been reluctant to hire back workers. They are instead opting
to push their slimmed-down work forces to produce more.

That has translated into a surge in productivity. It grew at annual rates of 7.6 percent, 7.8 percent and 6.3 percent in
the second, third and fourth quarters of last year.

The 3.6-percent rise in productivity for the first three months of this year marked a drop from the rates turned in over
the last three quarters. That is something that economists expect will occur as companies reach the limit of how much they
can expand output without hiring more workers.

However, that change is viewed as a necessary development for a sustained recovery because rehiring workers would boost overall
incomes. That allows them to increase consumer spending, which accounts for 70 percent of economic activity. The concern is
that unless incomes start rising, consumer spending will not expand and the recovery could falter.

The 1.6-percent fall in unit labor costs followed declines of 5.6 percent in the fourth quarter and 7.6 percent in the third
quarter. That indicates the deep recession has banished wage pressures for the moment.

For all of 2009, productivity, the amount of output per hour of work, rose at a 3.7-percent rate, nearly double the 2-percent
increase in 2008. It was the fastest annual increase in productivity in seven years.

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