Productivity Drops to Revised 0.6% : Economy: Growth rate for second quarter falls well below estimates and, combined with jump in labor costs, could increase anxiety over interest rates.

WASHINGTON —  Growth in the productivity of American workers slowed considerably in the spring, reflecting an easing in the overall pace of economic growth, even while the cost of their labor surged, according to government figures released Thursday.

Those developments, detailed in Labor Department reports, could cause new anxiety over whether the economy’s direction will prompt the Federal Reserve to raise interest rates again this year.

Meanwhile, the Commerce Department reported that orders to factories rose a strong 2.1% in July, the biggest increase this year, after a 0.8% gain in June. Economists said those figures offer fresh evidence of a resurgent manufacturing sector.

The Labor Department reported that productivity--the amount of output for each hour of work--increased at an annual rate of 0.6% in the April-June quarter. That is the slowest quarterly increase since the second quarter of 1998, when productivity rose at 0.4%. The 0.6% rate also is far below the 3.6% annual rate for the first quarter. The revised second-quarter figure shows that productivity growth was slower than the government estimate of 1.3% a month ago.

Analysts said the slowdown in productivity reflects the fact that the growth of gross domestic product--the total output of goods and services--also slowed sharply to 1.8% in the second quarter of this year, compared with 4.3% for the first quarter. At the same time, unit labor costs, considered a key measure of whether labor costs are rising at a rate that could fuel inflation, sprinted ahead at an annual rate of 4.5% in the second quarter. That is the largest increase since the first quarter of 1994, which also saw a 4.5% rise.

In another report, the Labor Department said Thursday that the number of Americans filing new claims for unemployment benefits last week rose by 4,000 to 289,000. Economists consider a jobless claims level of less than 300,000 an indication of an extremely tight labor market.

The government will release its August unemployment report today. Many economists expect the rate--now at 4.3%--will match the 29-year low of 4.2%.

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Business Productivity

Percentage change from previous quarter at annual rate, seasonally adjusted:

2nd quarter 1999: +0.6%

Source: Labor Department