By David Lawder
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.
"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.
FED ANGST
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.
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.
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.
LONG-TERM TREND
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.
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.
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.
