High productivity, until now the saving grace for the U.S. economy during the current slowdown, appears to be slowing and may even decrease, RBC Financial Group says.

In a report Thursday, the bank noted that non-farm productivity in the U.S. rose 1.6% during the first quarter of 2003, a slightly weaker-than-expected result with markets anticipating a 2.0% increase. Output gained 1.4% during the quarter, but hours worked declined 0.1%, less than what was forecast.

Meanwhile, the report says, unit labour costs decelerated to an expected 1.9% rate during the first quarter of the year after growing 3.2% in the previous quarter and real hourly compensation fell 0.3% in the first quarter after increasing 1.9% in the fourth quarter of 2002. In the manufacturing industry, productivity grew by 2.1% during the first quarter, this given that a contraction in hours worked (-2.6%) outpaced a drop in output (-0.6%) for the second straight quarter. On balance, manufacturing hours worked is down by 2.2% over the past 12 months while the year-ago growth rate for output was just 0.5%.

“Indeed, relatively high productivity has been the saving grace for the U.S. economy through this slowdown,” said economist Carl Gomez. “However, it appears that the rate of this productivity growth is now slowing down, likely because the room for U.S. firms to keep slashing away at jobs is becoming smaller and smaller.

“As such, what remains necessary for an improvement in productivity at this stage of the cycle is for the recovery to gain more traction thereby improving the other side of the productivity equation – output. However, if this recovery remains mundane, productivity growth will probably continue to slow — as is it did with this report — or in the worst case, even show a decrease.”

The report says that on the labour side, jobless claims reached 448,000 last week exceeding expectations, while the previous week’s corresponding number was revised up to 461,000. Continuing claims also increased, now to 3.68 million.

On balance, initial claims have remained above the critical 400,000 level for 11 consecutive weeks, which ultimately points to a still contracting labour market, Gomez said. “In fact, this jobless economic recovery now appears to be extending beyond its length following the 1990-1991 recession, and it seems almost certain that a recovery in labour markets will lag nearly every other indicators during this business cycle.”