Productivity weakens. Time to cheer?

Productivity fell 0.9 percent last quarter, suggesting that US companies will slowly start to hire more workers.

Lynne Sladky/AP
Francis Didier (right) waits to meet representatives from Kaplan University at a job fair sponsored by National Career Fairs in Dania Beach, Fla. Productivity dropped this spring for the first time in more than a year, a sign that companies may need to hire more workers in the near future.

US productivity weakened last quarter for the first time since 2008.

It sounds like bad news. Workers on average produced less output per hour than they did in the first quarter, about 0.9 percent less on an annualized basis, the US Department of Labor reported Tuesday.

What it really signals, however, is that the recovery is moving into a new phase. Companies can no longer boost profits by slashing their workforce and making their remaining employees work harder. The result: They'll have to start hiring.

"It's almost as if companies overdid it: They went too far in slashing ther workforce," says IHS Chief Economist Nariman Behravesh. "The only way they're going to grow now is by adding workers."

That's because the old strategy is no longer working. The average employee worked 3.6 percent more hours last quarter, the biggest quarterly rise (on an annualized basis) since 2006, when the economy was humming. But that rise in hours only translated into a 2.6 rise in output, which pushed up labor costs.

Companies' new hiring will still be slow.

"It's a particularly slow comeback," says Mr. Behravesh, who doesn't expect monthly employment increases of 150,000 until mid-2011.

What's good for workers isn't good for corporate balance sheets, at least in the short term. Companies' earnings won't grow as robustly going forward as they have in the past year, economists say.

"If firms are forced to hire more workers to expand output further, rather than relying on productivity gains, personal incomes would rise at the expense of weaker corporate profits," writes Paul Ashworth, an economist with Toronto-based Capital Economics, in an analysis.

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