By Shobhana Chandra Aug. 11 (Bloomberg) -- The productivity of U.S. workers grew in the second quarter at the fastest pace in almost six years as employers squeezed more out of remaining staff to bolster profits. Productivity, a measure of how much an employee produces for each hour worked, rose at an annual 6.4 percent pace, more than forecast, after a 0.3 percent gain the prior three months, Labor Department data showed today in Washington. Labor costs fell by the most in eight years. Lower expenses mean companies may need to fire fewer workers as sales stabilize, the first step toward ending the worst employment slump in the post World War II era. Efficiency gains also help curb inflation, giving Federal Reserve policy makers, meeting today and tomorrow, extra time to remove stimulus. “This is good for the cost structure of companies,” said Chris Rupkey, chief financial economist at Bank of Tokyo- Mitsubishi UFJ Ltd. In New York. ‘The Fed will be encouraged on the inflation story. They have taken a lot of heat on the exit strategy. Certainly there is no rush to exit.” Stock index futures trimmed losses and Treasury securities gained after the report indicated labor costs will not contribute to inflation. The contract on the Standard & Poor’s 500 index was down 0.2 percent 1,005.2 at 8:43 a.m. in New York. The yield on the benchmark 10-year note fell to 3.77 percent from 3.78 percent late yesterday. Lower Costs Labor costs decreased at a 5.8 percent pace, the second consecutive drop and the biggest since 2001. Expenses were down 0.6 percent over the last four quarters, the biggest fall in five years. Economists had forecast productivity would rise at a 5.5 percent annual pace, according to the median of 62 forecasts in a Bloomberg News survey. Estimates ranged from increases of 7 percent to 2.9 percent. Unit labor costs, which are adjusted for efficiency gains, were projected to drop 2.5 percent. Compared with the second quarter of 2008, productivity was up 1.8 percent, the most in a year. Hours worked fell at a 7.6 percent pace, after a 9 percent drop. Output fell at a 1.7 percent rate. Compensation Compensation for each hour worked climbed at 0.2 percent annual pace, compared with a decline of 2.4 percent in the prior quarter. Among manufacturers, productivity jumped at a 5.3 percent pace, compared with a 2.6 percent decrease. A Labor report last week showed payrolls fell by 247,000 in July after a 443,000 drop in June, in a sign job losses are already starting to slow. The economy has lost 6.7 million jobs since the recession began in December 2007. Smaller workforces have helped stem the slump in profits. For the second quarter, 72.2 percent of S&P 500 companies beat consensus earnings estimates, just below the 72.3 percent ratio five years ago that was the highest since at least 1993, data compiled by Bloomberg showed as of yesterday. Investors are getting encouraged by the improvement. The Standard & Poor’s 500 index rose in each of the last four weeks, leaving it trading at the highest level relative to earnings since 2004. DuPont Co., the third-biggest U.S. chemical maker, was one of the companies that posted second-quarter profit that topped analysts’ estimates as it trimmed expenses faster than expected. Wilmington, Delaware-based DuPont is cutting fixed costs by $1 billion, in part by shedding 2,500 employees and more than 10,000 contractors, and has achieved 60 percent of its cost- reduction target. Cutting Payrolls “Our aggressive actions to improve productivity and reduce costs across the company are paying off,” Chief Executive Officer Ellen Kullman said in a statement last month. Some companies are already bringing employees back as demand stabilizes. Union Pacific Corp., the second biggest U.S. railroad by sales, trimmed payroll by operating with about 45,000 workers in the second quarter, its lowest employment since its 1996 purchase of Southern Pacific Rail Corp. Omaha, Nebraska-based Union Pacific, whose profit also beat analysts’ estimates, has recalled some furloughed workers since June as weekly carload rates gain. About 900 of the 5,300 conductors, engineers and other employees laid off as of mid- June have returned, a spokesman said in July. Rising productivity may help Fed officials build a case for keeping the benchmark lending rate close to zero for a long period of time. In addition to cutting rates, Fed policy makers injected billions of dollars to unclog the financial system after lenders clamped down on credit. In the 1990s, former Fed Chairman Alan Greenspan was one of the first to recognize productivity was accelerating because of the increased use of computers and the Internet, and that the improvement would contain inflation even as the economy gained strength and unemployment stayed low. The realization allowed the Fed to keep interest rates little changed from 1996 to 1999. To contact the reporter on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net

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