U.S. productivity numbers disappointed traders this morning with a weaker than expected result. Nonfarm productivity dropped by 0.2% in the fourth quarter, the first decline in the number since the second quarter of 2001.

BMO Nesbitt Burns says that the drop, “largely reflects the soft GDP report for the quarter, rather than signalling that U.S. workers have suddenly become unproductive. From a year ago, productivity increased by 4.7%, and in the third quarter it was upwardly revised to a 5.5% increase.”

With productivity slipping, unit labour costs jumped by 4.8%, the largest increase since the third quarter of 2000, BMO notes. “A continuation of this trend would likely crimp profit growth, and add upward pressure on inflation,” it says.

RBC Financial calls the numbers “disappointing and somewhat worrying given the 5% growth rate in the first three quarters of the year.”

RBC is also concerned about nascent inflation pressures. While it says that there is nothing for the Fed to be concerned about on the inflation front in the near term. “Longer term, however, the story is different. Productivity tends to be weak as hiring catches up to a strengthening economy, which is what we expect to see later this year. The jury remains out on whether productivity growth will then re-accelerate to late 1990s levels. In the meantime, international investors who see weak productivity will have yet another reason to shift out of U.S. dollar assets, putting downward pressure on the U.S. dollar and upward pressure on import prices.”

“By later this fall, we expect the Fed will be raising rates to offset future inflation pressures,” RBC says.

“These productivity figures support the less rambunctious outlook for profits that has developed of late. They also hint at renewed hiring in the U.S. and are consistent with the idea that inflation has bottomed,” Nesbitt concludes.

Also, U.S. initial jobless claims fell 11,000 to 391,000 last week. “The claims data do not point to any decisive improvement or decline in labour market conditions, which itself is not a good sign given the recent weakness in the U.S. job market,” says RBC.

However, Nesbitt sees”a gradual thaw in the job market”.