WASHINGTON (Reuters) - U.S. productivity rose at a solid clip in the fourth quarter as employers sharply cut the number of hours worked, restraining growth in labor costs, according to a report on Wednesday that may ease lingering concerns on inflation at the Federal Reserve.
U.S. non-farm productivity, or hourly output per worker, rose at a stronger-than-expected 1.8 percent annual rate, keeping the rise in unit labor costs at a smaller-than-expected 2.1 percent, the Labor Department report showed.
Economists had expected worker productivity to rise just 0.4 percent, with unit labor costs -- a gauge of inflation and profit pressures scrutinized by the Fed -- up 3.5 percent.
"By lessening inflation risks, this report may soothe opposition to (interest) rate cuts within the Federal Reserve," said Roger Kubarych, chief economist for UniCredit/Bayerische Hypo-und Vereinsbank in New York.
Financial markets largely ignored the data. Bond prices, which normally would gain support from benign inflation news, fell as investors moved money into the stock markets, where prices rose on upbeat corporate announcements.
FED ANGST
The Fed has slashed benchmark interest rates to 3 percent from 5.25 percent in five steps dating to mid-September as credit spigots threatened to run dry and signs emerged that weakness in the housing sector was spreading.
A report on Friday that showed the economy shed jobs last month for the first time in 4-1/2 years and data on Tuesday showing a contraction in the services sector have convinced financial markets that further rate cuts are on the way.
While the central bank has said it expects inflation to moderate, gauges of core prices, which strip out food and energy costs, have marched higher recently and some officials continue to express concern.
Dallas Federal Reserve Bank President Richard Fisher voted against the last rate cut a week ago and Philadelphia Fed chief Charles Plosser said on Wednesday he was skeptical slower growth would help ease core price pressures.
By cutting back on the total number of hours worked, employers should be able to keep better control of their costs as growth slows, alleviating any pinch on their bottom line and lessening any need to raise selling prices.
The number of hours worked in the fourth quarter shrank 1.5 percent, the largest decline since a 2.1 percent drop in the first quarter of 2003. Even with that decline, non-farm businesses were able to expand production by 0.4 percent.
"It is remarkable that U.S. companies were able to maintain productivity growth under the circumstances, but that was only because of their flexibility in trimming labor input," Kubarych said.
LONG-TERM TREND
Even though productivity held up better-than-expected in the final three months of last year, it slowed sharply when compared to the third quarter. The department said productivity rose at a revised annual rate of 6 percent in the third quarter, the strongest gain in four years.
Similarly, the fourth quarter rise in unit labor costs marked a reversal from the third quarter, when they fell at revised 1.9 percent pace.
Year-on-year productivity grew 2.6 percent in the fourth quarter, matching the third quarter's gain as the largest increase since the period ended in second quarter of 2004.
Still, the data underscored a longer-term slowing in productivity growth, which had averaged 3.5 percent a year from 2002-2004. Over the past three years, it has grown an average of only 1.5 percent a year.
"Advances in information technology boosted the productivity numbers earlier this decade," wrote Patrick Newport, U.S. economist at Global Insight in Lexington, Massachusetts. "This boost, clearly, has gone away."
Long-term productivity trends shape the economy's growth potential, which policy-makers estimate for a sense of how fast the economy can grow without sparking price pressures.
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