U.S. worker productivity rose at annual rate of 0.9% in Q4, more than a preliminary estimate of 0.7% issued last month, signaling a possible solid hiring pace in the year ahead; labor costs increased at 2.8% annnual rate

Cindy Allen

WASHINGTON , March 7, 2012 (Associated Press) – U.S. workers were more efficient at the end of last year, although their gains in productivity have slowed from this summer.

Weaker productivity growth could be a signal that the employers will keep hiring this year at a solid pace.

The Labor Department said productivity rose at an annual rate of 0.9 percent in the October-December quarter. The second and final estimate was slightly up from preliminary estimate of 0.7 percent issued last month. But it was just half the growth in worker output estimated in the July-September quarter.

Labor costs increased at a 2.8 percent rate in the fourth quarter, slower than the 3.9 percent rise in the third quarter. With millions of people still out of work, economists say there is little danger that wage pressures will push inflation higher.

Productivity is the amount of output per hour of work. A slowdown in productivity is bad for corporate profits. But it can be a good sign for future hiring. It may mean that companies are unable to squeeze more work out of their existing work force and must add more workers if they want to grow.

That trend appears to be under way.

The economy has added an average of 200,000 net jobs per month from November through January, which has helped lower the unemployment rate to 8.3 percent. And economists are predicting another big month of hiring in February, forecasting the addition of 210,000 net jobs.

The government reports Friday on February job growth.

Adding to that optimism Wednesday was a report from ADP, a payroll provider, that estimated companies added 216,000 workers last month. That survey did not include government agencies, which have been cutting jobs.

"While strong productivity growth is usually good for the economy, there are times when slower productivity gains can also be helpful by contributing to jobs and income gains," Richard DeKaser, an economist with the Parthenon Group.

Productivity grew last year just 0.4 percent. That's far below the 4 percent growth in 2010, the most in nine years. However, the main reason productivity soared in 2010 was that it followed the worst recession in decades, when employers laid off millions of workers.

Forecasters with the National Association for Business Economics forecast 1.5 percent growth in productivity for 2012.

DeKaser said the pattern seen in productivity during the recession and in the past two years of recovery is very typical. Productivity climbs as businesses lay off workers in the face of falling demand.

When demand picks up, companies are at first hesitant to add workers because they are worried that the rebound may falter. Instead, DeKaser said, companies make do with their existing work force. It is only when they reach the limit of how much work they can squeeze out of existing employees, that they resume hiring.

That return to more normal hiring patterns is good for the economy because it reduces unemployment and provides consumers with more spending power. Consumer spending accounts for 70 percent of economic growth.

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