WASHINGTON - Stronger productivity and jobless figures gave Wall Street food for thought Thursday a day ahead of a key employment report that will shed light on whether the US economy is indeed suffering a slowdown.
Newly released data closely watched by the Federal Reserve showed that US businesses boosted productivity at a 2.6 percent annualized pace in the first quarter.
Unit labour costs -- a key measure of inflationary pressures from compensation -- increased 2.2 percent at an annualized rate.
"Labour costs have gone from a major downward influence on inflation to a roughly neutral -- maybe even slightly upward -- influence," said Steve Stanley, chief economist for RBS Greenwich Capital.
"Not a reason for the Fed to panic and go to 50 basis points (hikes in US rates), but another reason for the building concern among central bankers about inflation risks," he said.
Faced with evidence that inflation is getting stronger while economic growth is flagging, the Federal Reserve has chosen to stick to its core mandate of quelling price pressures by hiking US interest rates repeatedly.
This week the Fed tightened US borrowing costs for the eighth time since June, taking the federal funds 25 basis points higher to 3.0 percent.
Strength in consumer prices and other inflation indicators have taken precedence in the Fed's thinking over flagging growth figures, which most economists ascribe to a cyclical moderation rather than a full-scale downturn.
Other figures out Thursday showed that US jobless claims rose 11,000 to a seasonally adjusted 333,000 in the week ended April 30.
Economists were expecting initial jobless claims to rise to about 324,000. The Labor Department ascribed the increase to seasonal factors.
But the four-week average of new claims, considered a more reliable gauge of unemployment, dipped by 2,000 to 321,500, its lowest in eight weeks.
Economists said the latest figures suggested that Friday's closely-watched "non-farms payroll" report, which measures how many new jobs the US economy is creating, would show only moderate growth.
"We're not likely to see a wild breakout number to the upside. High productivity gains are not conducive to a rapidly expanding workforce," Wachovia economist Jason Schenker said.
"We've entered the mid-cycle phase of the economy. We've been expanding and now we're moderating. But job creation still remains solid," he said.
The consensus on Wall Street is for the non-farms payroll report to show an extra 175,000 jobs were created in April, after disappointing growth of 110,000 in March.
New job creation is seen as one of the best indicators of momentum, but the productivity figures are another key factor in judging the economy's health.
Greater productivity means higher profits for companies as they can get more out of each worker. Efficiency gains mean that it now takes just 82 US workers to produce what 100 could make in 2000.
In a research note, Merrill Lynch economists said "we expect healthy productivity growth to help keep profit margins high and go a long way to containing core inflation pressures over the next several quarters".
"While unit labor costs were on the high side, we don't expect this to mark the beginning of a trend since the slow down in economic growth on horizon will keep a lid on compensation," they said.
05/05/2005 16:21 GMT