U.S. Economy: Productivity Fails to Match Wage Gains

May 4 (Bloomberg) -- Productivity gains in the U.S. failed to keep pace with a jump in wages in the first quarter, pointing to a greater risk of accelerating inflation.

Labor costs climbed 2.5 percent, more than twice analysts' forecasts, and compensation for each hour worked jumped to an annual rate of 5.7 percent, the Labor Department said in Washington. The increase in wages exceeded a gain in productivity, which rose at an annual rate of 3.2 percent.

Companies may be squeezing as much as they can out of employees and equipment, economists said. To meet demand, they're hiring more workers and boosting compensation, risking faster inflation that may require the Federal Reserve to keep raising interest rates.

``Labor costs are starting to rise as tight labor markets have workers clamoring for better wages,'' said Chris Rupkey, senior financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. ``This is the first hint that the wage-price spiral has begun, and it is sure to be worrying Fed officials.''

Labor costs were predicted to rise 1.2 percent, according to the median estimate of economists polled by Bloomberg News. Productivity, a measure of how much an employee produces for each hour of work, was expected to grow 3 percent.

``Worker compensation is picking up, labor markets are tightening and unemployment will grind lower,'' said John Herrmann, director of economic commentary at Cantor Fitzgerald LP in New York. ``In turn, the Fed has to be a little wary about rising wages and the threat of pass-through'' into inflation.

Treasury Yields

Yields on 10-year Treasury notes held near their highest levels since 2002 after the report. The yield was 5.15 percent at 12:15 p.m. in New York and rose as high as 5.16 percent earlier today.

Many investors and traders are more focused on tomorrow's jobs report for April. The government is likely to say employers hired 200,000 workers last month, with the unemployment rate matching the lowest since July 2001, according to a Bloomberg survey.

A separate report today from the Labor Department showed first-time claims for unemployment benefits rose to 322,000 last week from 317,000. Claims were expected to fall to 310,000 from 315,000 initially reported, based on the median forecast in a Bloomberg survey of economists.

The timing of spring break at schools across the country and its effect on the employment of temporary workers made it difficult for the government to seasonally adjust the statistics, a Labor Department official said.

``These data do little to dispel the notion that the labor market is continuing to tighten,'' said Omair Sharif, an economist at RBS Greenwich Capital in Greenwich, Connecticut. ``The solid pace of payroll advances so far this year points to strength in underlying labor demand.''

Hours Worked

Hours worked increased at a 2.5 percent pace in the first quarter compared with a 1.8 percent increase in the previous three months, today's productivity report showed. Output jumped at a 5.8 percent rate compared with a 1.5 percent fourth-quarter gain.

Among manufacturers, productivity rose at a 4.2 percent pace after rising at a 4.7 percent rate in the fourth quarter. Productivity at U.S. non-financial corporations, a measure watched by the Fed, rose at a 2.5 percent rate in the fourth quarter. Those data are reported with a one-quarter lag.

Productivity growth has averaged about a 3.5 percent rate each quarter during the expansion that started in November 2001, compared with 2.1 percent in the record 10-year expansion that ended March 2001.

Current Expansion

Increases in unit labor costs during the current expansion have averaged 1 percent a quarter, down from 2 percent a quarter during the prior expansion.

An April 28 report from the Commerce Department showed gross domestic product, the value of all goods and services produced in the U.S., rose at an annual rate of 4.8 percent in the first quarter, up from 1.7 percent in the fourth quarter...

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