Productivity growth slows while wage pressures drop sharply

WASHINGTON — The growth in worker productivity slowed in the first three months of this year but so did wages, providing evidence that a slowing economy is holding down inflation.

The Labor Department reported that productivity, the amount of output per hour of work, rose at an annual rate of 1.7 percent in the January-to-March quarter, down from a 2.1 percent rise in the final three months of last year.

Wages slowed even more sharply with unit labor costs rising at a 0.6 percent rate, compared to a 6.2 percent surge in the final three months of last year when year-end bonuses for high-income workers had inflated the number.

The increase in productivity was slightly better than had been expected, while the slowdown in unit labor costs was much steeper than economists had been expecting.

Wall Street surged on the news, believing that the lower wage pressures raised the chances the Federal Reserve might start cutting interest rates later this year.

The Standard & Poor's 500 index climbed above the 1,500-level for the first time since September 2000, a move that came just a week after the Dow Jones industrial average closed above 13,000 for the first time.

Stocks have been soaring in recent weeks on strong first-quarter earnings reports from a number of companies which have offset reports of a further slowing in economic growth.

In other economic news, the Institute for Supply Management reported that the service sector, where 80 percent of Americans work, expanded at a faster rate in April than the previous month with its index rising to 56 compared to a reading of 52.4 in March.

Separately, the government reported that the number of Americans filing claims for unemployment benefits fell by 21,000 last week to 305,000, the lowest level since mid-January. It was a bigger-than-expected improvement and marked the third straight drop in weekly jobless claims.

While rising wages are good for workers, the Fed becomes worried if wage pressures outstrip productivity gains, a development that can send inflation higher.

The Fed boosted interest rates for two straight years in an effort to slow economic growth enough to dampen rising inflation. The Fed meets again next Wednesday and is expected to keep rates unchanged, believing it has done enough to slow the economy and cause inflation to retreat.