Companies’ productivity growth ebbs, but stepped-up hiring may hinge on debt crisis in Europe

Productivity growth ebbs; hiring outlook uncertain

WASHINGTON — Companies are reaching a point where they can no longer squeeze more work out of leaner staffs, normally a sign that a hiring rebound could be near. But the growing European debt crisis is unsettling the global economy, and may affect employers’ hiring plans.

U.S. productivity grew at an annual rate of 3.6 percent in the first quarter, down sharply from the previous three quarters. Analysts predict productivity, the amount of output per hour of work, will slow even further.

“Companies are close to the limits of what they can do with their existing staff. They are going to have to start rehiring people,” said Nigel Gault, chief U.S. economist at IHS Global Insight.

But fears that Greece’s debt problems could spread to other countries sent Wall Street into a free fall Thursday. The Dow Jones industrial average plunged nearly 1,000 points before recovering to close at a loss 347 points.

If the crisis drags on, it could leave employers less confident about the economy.

Sung Won Sohn, an economics professor at the Smith School of Business at California State University, predicted the European debt crisis will continue to keep global markets on edge.

“The problem is that Europe took too long to rescue Greece,” he said. “Now we are talking about a crisis of confidence and when confidence is shaken like this, it takes a long time to stabilize.”

The job market is showing gradual improvement, according to a second Labor report. Applications for unemployment benefits dropped for a third straight week, decreasing by 7,000 to 444,000.

Still, economists predict the April jobless number, which is to be released Friday, will show unemployment stuck at 9.7 percent for a fourth straight month.

The economy has been growing since last summer, though firms have been slow to hire back workers. Many have opted instead to push their slimmed-down workforces to produce more. But Gault and other analysts said they look for companies to start edging back into hiring.

“Firms are reaching the limits of worker endurance,” said Sal Guatieri, an economist at BMO Capital Markets.

Payroll jobs increased by 162,000 in March, the best showing in three years. Many economists were looking for a gain of around 200,000 in April.

Adding to the picture of an improving economy were reports that major retail chains were busy in April. That suggests a jump in consumer spending in the first quarter was continuing in April.

Economists said the rehiring of workers will help sustain the recovery by boosting overall incomes. That would allow households to increase consumer spending, which accounts for 70 percent of economic activity. Unless incomes start rising, consumer spending may not rise enough to strengthen the recovery.

Companies’ unit labor costs — which measures their hourly cost of production — fell 1.6 percent. That followed declines of 5.6 percent in the fourth quarter and 7.6 percent in the third quarter. The trend indicates wage pressures remain scant.

For all of 2009, productivity rose at a 3.7 percent rate, nearly double the 2 percent increase in 2008. It was the fastest annual increase in productivity in seven years.

The strong gains in productivity and falling unit labor costs have kept a lid on overall inflation. That has given the Federal Reserve leeway to keep a key interest rate at a record low level for more than a year and help jump-start economic growth.

AP Economics Writer Chris Rugaber contributed to this report.