US workers: still efficient, but slower gains

Productivity has been at historic highs for years, but spring's rate was less stellar.

Centrix Financial bought state-of-the-art computers six months ago, and since then its loan managers have boosted their productivity by 10 to 12 percent. But now the Denver-based auto-finance company is out hiring. The firm found there is only so much efficiency it can squeeze out of its workers, even with the new machines.

"There is only so much technology can accomplish," says Robert Sutton, Centrix's CEO. "We still need to have people make phone calls."

Across the United States companies have spent billions of dollars on training, better lighting and office design, and, like Centrix, software and computer systems. It's a sizable investment in worker productivity - the ability to produce more work in the same amount of time - but one that now may be yielding smaller gains than in recent years.

If the rate of improvement in productivity continues to slow, the dropoff has the potential to ripple through the economy in the form of higher inflation or slower overall economic growth. A less efficient economy makes it harder for American goods and services to compete with those from nations where labor is cheaper.

A slowdown in productivity growth, moreover, may have the effect of helping to drive up interest rates, affecting millions of Americans who would then pay higher rates on their credit cards and loans. The Federal Reserve met Tuesday to discuss interest-rate policy and was widely expected to raise short-term rates another one-quarter percentage point, the 10th consecutive increase.

"Slowing productivity is the single most important reason the Fed is raising rates as it has," says Richard DeKaser, chief economist at National City Corp. in Cleveland.

The degree of the slowdown now is clear. Productivity rose at an annual rate of 2.2 percent in the second quarter, down from 3.2 percent for the first quarter of 2005, the US Department of Labor reported Tuesday. That is the slowest pace since last summer.

At the same time, however, labor costs slowed to an annual rate of increase of 1.3 percent, the most sluggish rise since spring 2004.

Economists are not surprised to see the efficiency gains slow. Productivity growth is almost always strongest early in an economic expansion, when orders pick up, but businesses aren't hiring more workers because they're not convinced the recovery is for real. In 2002, at the beginning of the current expansion, productivity rose 4 percent, followed by 3.8 percent in 2003 and 3.4 percent last year. In the first half of this year it is running at a 2.7 percent annual rate.

"By historical standards it's still pretty good, and would have been something to celebrate 10 years ago," says DeKaser.

For several years, Fed Chairman Alan Greenspan has voiced his amazement at what he termed "the productivity feast," which in the first quarter of 2002 rose at an 8.4 percent annual rate. Mr. Greenspan has said productivity gains should not be seen "as anything negative since that's where standards of living come from, that's what indeed has made this economy the most extraordinarily productive in the world."

One reason for the gains: Corporations are paying workers to become more productive.

"They are setting up bonus incentive plans for employees [that are] tied to productivity, efficiency, customer service, whatever measures are important," says Bill Coleman, senior vice president at Salary.com. "It's a growing trend to give incentives to a greater part of the workforce."

The hiring picture is now bright enough for companies to begin thinking about retaining workers, he says. "In 2002 and 2003 people were just happy for a job, but employees will only tolerate pay freezes and greater workloads for so long."

Fresh evidence that the US job picture continues to improve arrived last week. The Labor Department reported some 207,000 new positions were created, a hearty gain. As Americans watched their employment prospects brighten, some 450,000 people reentered the workforce.

Companies have added many of these new jobs because they can't produce more without more workers. That's what happened at Alcoa's fastener division in California. An uptick in the aerospace market has increased the demand for high-tech bolts and screws that help hold airplanes together. Alcoa, which laid people off after 9/11, is now hiring several hundred workers - from machine operators to quality inspectors to shipping clerks - for its facilities in Fullerton and Los Angeles.

"We try to see if there is a way to achieve the gains through productivity," says Kevin Lowery, a spokesman for Alcoa. "But eventually you reach a need to hire more people," says Mr. Lowery, noting that Alcoa as a whole plans to shed 8,000 jobs worldwide over the next year.

Many companies, such as Centrix Financial, have turned to technology to boost efficiency. New desktop computers allow Centrix's loan underwriters to transfer work to different offices and do several jobs on the same machine. Mr. Sutton, the CEO, says his 1,200 workers were able to produce more loans per hour. Even with better productivity, however, he plans to hire 100 to 125 new workers.

"We know that it takes 1-1/2 persons to manage 1,000 loans," Sutton says. "It's a fairly constant figure."