Productivity declines, labor costs rise for second straight quarter

With costs up and workers less productive, companies become less inclined to hire, a negative signal for a struggling job market stuck above 9 percent unemployment. 

Higher productivity — a measurement of how much a worker produces in an hour — can be a positive for the economy because companies can typically raise salaries without pushing up prices. 

During the recession, when companies let go of millions of workers, productivity increased sharply and businesses adjusted by investing in better machinery to increase efficiency. 

A short-term slowdown of productivity can signal a need for companies to add to their payrolls as workers produce as much as they can to meet demand. 

The combination of rising labor costs, lower productivity and a slowdown in the economy is a bad signal, economists argue. 

Although the unemployment rate is 9.1 percent and the private sector isn’t adding jobs at a fast enough pace to reduce unemployment, these figures could mean that firms hired too many new employees and are now getting less production from more workers, economists say. 

The economy appeared to trending upward through the end of 2010 and into this year. But economic growth has slowed to an annual rate of 0.8 percent for the first six months of the year, the weakest result since the recession ended in June 2009. 

On average, 215,000 jobs a month were added in February through April, but that has plummeted to only 72,000 jobs per month since then. 

In addition, consumers are spending less and have had less discretionary money in their budgets because of high gas prices. 

Federal Reserve Chairman Ben Bernanke has said he expects high prices and other factors are temporary and will fade, allowing the economic recovery to pick up pace again during the last half of the year. 

There are plenty of factors playing into the languishing economy as fears increase about another U.S. recession and concerns continue over the European debt crisis, along with a downgrade of U.S. debt from AAA to AA+ that has roiled the world stock markets. 

The Federal Reserve is meeting Tuesday to determine whether to raise interest rates and what, if any effect, productivity levels are having on inflation.