US worker productivity shrank in the final three months of 2012 although the decline was caused by temporary factors.

Productivity contracted at an annual rate of 2% in the three months from October to December quarter, the biggest drop since the first quarter of 2011, the Labor Department said today.

Productivity had risen at a 3.2% rate in the three months from July to September.

Labour costs rose at a 4.5% rate in the fourth quarter, the fastest gain since the first quarter of 2012.

Productivity is the amount of output per hour of work. It shrank in the fourth quarter because economic activity contracted while hours worked rose.

The US economy declined at an annual rate of 0.1% in the last three months of 2012, a drop caused mainly by deep defence cuts and slower restocking, changes not expected to last.

The trend in productivity has been weak for the past two years. For all of 2012, productivity rose by just 1% following an even smaller 0.7% rise in 2011. Companies may ultimately need to hire more workers if they see only modest gains in productivity and more demand for their products.

Economists predict worker productivity will be weak in 2013. Higher productivity is typical during and after a recession, they noted. Companies tend to shed workers in the face of falling demand and increase output from a smaller work force.

Once the economy starts to grow, demand rises and companies eventually must add workers if they want to keep up.

For all of 2012, labour costs were up a modest 0.7%. That compared to a gain of 2% in 2011 and a decline of 1% in 2010.

The US Federal Reserve closely monitors productivity and labour costs for any signs that inflation is affecting wages. Mild inflation has allowed the Fed to keep interest rates at record lows in an effort to boost economic growth and fight high unemployment.

US unemployment aid applications decline

Fewer Americans sought unemployment benefits last week, indicating companies continue to hire at a modest but steady pace.

The Labor Department also said today that weekly applications for unemployment benefits fell 5,000 to a seasonally adjusted 366,000.

The four-week average, a less volatile measure, dropped to 350,500, the lowest in nearly five years. The average is low because of seasonal factors, which reduced applications sharply last month.

Weekly applications are a proxy for layoffs. When layoffs decline, net hiring typically rises.

The four-week average of applications has dropped nearly 6% in the past three months. At the same time, hiring has picked up - US employers added an average of 200,000 jobs a month from November to January.