Employers are managing to boost production without creating new jobs. The question is when they'll feel the need to ramp up hiring.
Squeezing more output from their existing staffs allowed companies to boost productivity in the October-December quarter. And last week, the number of people filing new claims for jobless aid rose. The two Labor Department reports Thursday suggested that companies are still cutting costs and putting off hiring even as the economy recovers.
Many employers lack confidence that the recovery is sustainable, especially as government stimulus measures fade, economists said. Companies still feel bruised from the recession.
"Businesses have been through a traumatic experience and are going to be cautious about hiring," said Julia Coronado, senior U.S. economist at BNP Paribas.
Productivity rose by a seasonally adjusted 6.2 percent in the fourth quarter, above analysts' expectations of a 6 percent rise. That was the third straight quarter of sharp gains. It indicated that companies are squeezing more output out of their work forces.
Productivity often increases at the end of recessions as companies ramp up output before hiring new workers. Rising productivity can raise living standards in the long run. But it can also make it easier for companies to put off adding jobs.
The department also said labor costs fell 4.4 percent, the third decline in the past four quarters. Falling labor costs can boost company profits. Hourly compensation rose 1.5 percent, the department said. But labor costs fell because the rise in compensation was much less than the productivity increase.
The department's separate report on initial claims for jobless benefits said claims rose unexpectedly last week by 8,000 to 480,000. The rise in claims is the fourth in the past five weeks. It disappointed economists, who thought claims would resume a downward trend evident in the fall and early winter. The four-week average, which smooths fluctuations, rose for the third straight week to 468,750.
"It is starting to look as though the downward trend in claims ... has stalled," Ian Shepherdson, chief U.S. economist at High Frequency Economics, wrote in a note to clients.
The four-week average had fallen 32 percent from August until early last month. That raised hopes that the economy would start to generate net job gains soon. But the reversal of the trend could mean that ramped-up hiring is still months away.
On Friday, the Labor Department will issue its January employment report. Economists project it will show a tiny gain of 5,000 jobs. But that wouldn't be nearly enough to lower the unemployment rate, which is expected rise to 10.1 percent.
Most economists say claims need to fall to about 425,000 or below for a month to signal that employers are stepping up hiring.
Still, some positive signs emerged in the productivity report. Hours worked in the fourth quarter rose 1 percent. That was the first increase since the second quarter of 2007. Output rose 7.2 percent, the largest increase since the third quarter of 2003.
To continue increasing production, economists say companies will eventually have to start adding jobs again. That should bring productivity gains back down toward their long-run average of about 2.5 percent.
"You can push your workers but so far," said Anika Khan, an economist at Wells Fargo Securities. "At some point businesses have to begin to hire."
What's not clear is when. Employers are increasing the hours worked for their current employees and adding temp jobs, Coronado said. Those are positive signs that companies want more labor.
"But it hasn't yet spilled over to permanent hiring," Khan said.
The economy could begin generating net job gains as early as March, Khan said. But they won't be enough to hold down the unemployment rate. Wells Fargo expects the rate to peak at 10.5 percent in the second half of this year.
Stocks sank as concerns about unemployment signaled to investors that the economic recovery will be sluggish. The Dow Jones industrial average fell about 214 points, or 2 percent, in midday trading. Broader stock averages were down sharply, too.
Employers have shed 7.2 million workers since the recession began. Productivity has jumped as the economy has begun to recover. The nation's gross domestic product, the broadest measure of output, rose 5.7 percent in the October-December quarter, the fastest rise in six years.
Productivity is the key ingredient to rising living standards. It enables companies to pay workers more without raising prices and spurring inflation.
A separate report from the Commerce Department reinforced that manufacturing activity has become a pocket of strength in the economy. Orders to U.S. factories posted a big gain in December — rising 1 percent last month, double the forecast by economists surveyed by Thomson Reuters. The advance was the eighth in the past nine months. It was led by orders for metals such as steel and aluminum, as well as machinery.
Meanwhile, the number of people continuing to claim unemployment benefits was unchanged at 4.6 million. That data lags behind initial claims by a week. But the continuing claims don't include millions of people who have used up the regular 26 weeks of benefits typically provided by states, and are receiving extended benefits for up to 73 additional weeks, paid for by the federal government.
More than 5.8 million people were receiving extended benefits in the week that ended Jan. 16, up from about 5.6 million the previous week. The extended-benefit figures aren't seasonally adjusted and are volatile from week to week. The rising number of people claiming extended unemployment insurance indicates that overall hiring hasn't picked up.
Still, some technology companies that laid off workers during the recession are starting to add jobs as they ramp up spending on equipment and software. Cisco Systems Inc., the world's largest maker of computer networking equipment, said Wednesday it will hire a net total of 2,000 to 3,000 people in the next few quarters. The company laid off 2,000 people during the downturn.
And search giant Google Inc. has said it would like to add between 2,000 and 3,000 jobs this year.
Meanwhile, other employers are still cutting jobs. Wal-Mart Stores Inc. said Wednesday that it will eliminate 300 administrative jobs at its headquarters. The company has cut almost 14,000 jobs in the past 13 months, including 11,200 positions at its Sam's Club stores.
Sony Pictures Entertainment Inc., a unit of Japan's Sony Corp., said Tuesday it is laying off 450 people and eliminating 100 open positions.
AP Business Writers Alan Zibel in Washington and Michael Liedtke in San Francisco contributed to this report.
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