By Bob Willis Feb. 4 (Bloomberg) -- The productivity of U.S. workers kept surging in the fourth quarter as companies squeezed more out of remaining staff to boost earnings. A measure of employee output per hour rose at a 6.2 percent annual rate, capping the biggest one-year gain since 2003, the Labor Department said today in Washington. Labor costs dropped at a 4.4 percent pace, more than anticipated, and fell 0.9 percent for all of 2009, the biggest drop in seven years. Efficiency improved last year as companies slashed worker hours even after sales stabilized, a feat that may be difficult to sustain much longer as demand continues to grow. Lower expenses also help curb inflation, giving the Federal Reserve room to keep the benchmark lending rate near zero. “It bodes well for reducing labor costs and keeping corporate profits robust,” said Robert Dye, a senior economist at PNC Financial Services Group Inc. in Pittsburgh. “Still, it’s a double-edged sword, showing how weak labor markets are.” Economists had forecast productivity would rise at a 6.5 percent annual pace, according to the median of 65 forecasts in a Bloomberg News survey. Estimates ranged from gains of 4.3 percent to 8.5 percent. Unit labor costs, which are adjusted for efficiency gains, were projected to drop 3.5 percent. More Claims More Americans unexpectedly filed first-time claims for unemployment insurance last week, raising concern an improvement in the job market was stalling, other figures from the Labor Department showed today. Initial jobless applications increased to 480,000 in the week ended Jan. 30, the most in seven weeks, from 472,000 the prior week. Stock-index futures extended previous losses following the higher-than-expected claims figures. The contract at the Standard & Poor’s 500 Index fell 0.9 percent to 1,086.2 at 8:43 a.m. in New York. Treasury securities rose. For all of 2009, productivity increased 2.9 percent, the biggest gain in six years. The economy grew 5.7 percent in the fourth quarter, even as employers cut 208,000 workers, indicating those Americans that still had jobs were more efficient. The fourth quarter’s growth rate was the strongest in six years. Hours worked rose at a 1 percent pace in the fourth quarter, showing that companies were already struggling to meet the increase in sales. Output climbed at a 7.2 percent rate. Compensation Cools Compensation for each hour worked climbed at 1.5 percent annual pace after increasing at a 5.5 percent pace in the prior quarter. Among manufacturers, productivity surged at a 7.8 percent pace. Payrolls may have increased by 15,000 workers last month, the second gain in the past three months, according to the median forecast of economists surveyed before tomorrow’s monthly employment report. The economy has lost 7.2 million jobs since the recession began in December 2007. Job creation in coming months will begin to slow productivity growth, according to Joe LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York. “The productivity gains of 2009 are unsustainable,” LaVorgna wrote yesterday in a note to clients. He said the gains were mainly “the result of rising output amid ongoing labor cuts,” which he said would be reversed as employers begin to hire to meet increased demand. Profits Rise A record nine-quarter earnings slump for Standard & Poor’s 500 Index companies ended in the final three months of 2009 with a 76 percent increase in profits, according to analyst estimates compiled by Bloomberg. Since Jan. 11, about 79 percent of index companies releasing quarterly results have exceeded the average projection, Bloomberg data show. Eaton Corp. is among companies no longer looking to trim staff. The Cleveland-based maker of hydraulics and valves has ended unpaid furloughs and doesn’t plan workforce cuts beyond its 17 percent reduction since 2008 as demand increases. Eaton saved almost $225 million in 2009 through unpaid furloughs of one week per quarter for its 70,000 workers. “The economy has continued to move along the slow recovery path that we thought it would,” Chief Executive Officer Sandy Cutler said Jan. 25 in an interview. As a result, the furloughs were canceled “as of the first of the year,” he said. No Hiring The news was not as good on the employment front. “There’s going to be a lot of pressure against hiring new people because we need higher volume just to absorb the capacity we’ve got inside of the company,” Cutler said. Cisco Systems Inc., the world’s biggest maker of networking equipment, is among firms seeing increasing demand. The San Jose, California-based company yesterday announced profits that topped analysts’ estimates and predicted an acceleration in sales as customers resumed projects they put off during the recession. Chief Executive Officer John Chambers heralded a new phase of economic recovery, citing a “dramatic improvement” in Cisco’s business in most areas. To contact the report on this story: Bob Willis in Washington at bwillis@bloomberg.net

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