U.S. productivity grew solidly in 2nd quarter

By Glenn Somerville

WASHINGTON (Reuters) - U.S. business productivity rose solidly in the second quarter as companies cut jobs to cope with rising costs, helping curb inflation pressures while also keeping a tight grip on stocks of unsold goods.

A Labor Department report on Friday showed worker efficiency, or output per employee, gained at a 2.2 percent annual rate in the second quarter.

While slower than the first quarter's 2.6 percent gain, analysts said it was strong enough that Federal Reserve policy-makers may be able to keep interest rates low into 2009 to bolster growth.

The Fed said on Tuesday that it considered inflation risks "of significant concern" but held its benchmark federal funds rate at 2 percent. Labor costs rose at only half the rate in the second quarter as in the first quarter.

"This new productivity data, along with subdued wage increases, indicate the Fed may keep interest rates steady for the balance of 2008 and early 2009," said Peter Morici, an economics professor at the University of Maryland.

Separately, the Commerce Department said U.S. wholesale inventories rose in June but so did sales, enabling wholesalers to keep their inventory-to-sales ratio at a record low 1.06 months' worth. That meant stocks of unsold goods were so lean they could be sold completely in just over a month.

Inventories were up 1.1 percent in June after gaining a revised 0.9 percent in May. Sales were up 2.8 percent after rising a revised 2.2 increase in May.

Some of the sales rise may have reflected higher prices, especially for goods like petroleum and machinery, but analysts said it still implied the government will revise up its estimate of overall second-quarter economic performance on the basis of stronger investment than it previously thought.

Stock prices were buoyed by a surge in the U.S. dollar's value as worries about growth in Europe depressed the euro. The U.S. currency's jump helped push down oil prices, which are priced in dollars, to under $115 a barrel and reinforced hopes that inflation pressures may ease.

The Dow Jones industrial average .DJI climbed 302.89 points to 11,734.32, while the Nasdaq Composite Index .IXIC rose 58.37 points to 2,414.10.

Prices for U.S. Treasury debt prices were mostly lower as investors moved back into stocks.

Dean Maki, managing director of Barclays Capital Inc, said in a research note that second-quarter gross domestic product may have risen at a 2.2 percent annual rate instead of the 1.9 percent rate the government estimated on July 31.

"The economy is limping along and businesses are doing whatever they can to remain competitive," said economist Joel Naroff of Naroff Economic Advisors in Holland, Pennsylvania, adding that the productivity report showed companies remained flexible enough to control labor costs despite soft economic conditions.

Businesses cut 165,000 jobs from payrolls in the second quarter, according to Labor Department data, which helped them control costs that are not being driven by rising petroleum or raw material prices.

Unit labor costs, a gauge of inflation and profit pressures closely watched by the Federal Reserve, rose 1.3 percent in the second quarter. That was well below the revised 2.5 percent increase registered in the first three months this year.  Continued...