Worker Productivity Below Estimates

Worker productivity in the Q1 was much lower than original estimates, according to a government report. Productivity increased by 1% in the quarter, down from the original estimate of a 1.7% gain, but matching the consensus of economists. The slower economic growth cut into productivity gain, which measures the output of U.S. workers. The slower productivity raised inflation, as the unit labor costs rose 1.8% in the quarter. It indicates growth was not so great in the first quarter and that went straight into productivity.

The lower productivity and higher labor costs could keep the Federal Reserve from moving to cut rates to spur the economy in the face of the slowing economy. Higher labor cost could lead to job cuts. U.S. employers announced plans in May to eliminate 71,115 jobs, up 32% from May 2006. It was the second consecutive month in which job cuts increased from the same period a year ago.

Still, year to date, the pace of job cutting remains below last year's level, but the gap is rapidly closing. Heavy downsizing in the computer industry dominated May job cuts. Heavy job cutting in the computer industry reflects a slowdown in business spending on new technology.

White House's Economic Forecasts

The White House recently lowered its forecast for economic growth this year even as it slightly upgraded its outlook for unemployment. The administration expects the GDP to grow by 2.3%, down from a previous projection of 2.9%. The main reason for the downgrade was due to extremely weak start in Q1 2007. The economic growth was merely 0.6% in this period, its worst showing in more than 4 years. The economy did much better in 2006 growing by 3.1%. The administration expects the economy will regain speed and grow by 3.1% in 2008 and 2009.

Federal Reserve Chairman Ben Bernanke, the administration and private economists expect the economy will rebound in the months ahead. The housing sector will play an important role in deciding whether the economy will improve or get worse. As of now no one is quite clear whether the housing market has bottomed out or there is more in store.

However the unemployment rate, which averaged 4.6% last year is expected to dip to 4.5% this year. That is slightly better than its old forecast that the unemployment rate would hold steady at 4.6%. Next year, the administration predicts the unemployment rate will edge up to 4.7%. Surprisingly the employment rate has remained strong even though the economy is showing signs of weakness. Analysts believe the reason has been that only housing and auto sectors were affected and did not affect other types of sectors.

Inflation directly affects the consumer prices. Inflation has been increasing this year due to higher prices for gas and other energy products. The administration expects consumer prices to rise by 3.2% this year. That's higher than the 2.6% increase previously projected. However the administration also expects consumer prices to rise by 2.5% in 2008 and edge down to 2.4% in 2009.

The White House's economic forecasts are issued twice a year. The administration's projections are in line with those offered by private analysts.

(Source: Yahoo Finance)