(Bloomberg) — The productivity of U.S. workers fell more than projected in the fourth quarter as the economy shrank, pushing labor expenses up and showing companies are approaching the limit of how much efficiency they can wring from employees.

The measure of employee output per hour decreased at a 2% annual rate, the worst performance in almost two years, after a 3.2% gain in the prior three months, a Labor Department report showed Thursday in Washington. The median forecast in a Bloomberg survey of 63 economists called for a 1.4% drop. Expenses per worker increased at a 4.5% rate, more than estimated. 

Companies ramped up hiring toward the end of 2012, a sign they’re finding it difficult to make do with the existing staff as sales improve. A pickup in consumer and business spending last quarter — even as the economy shrank due to a plunge in defense outlays and slower stockpiling — also will help to improve the job market this year. 

“Companies have been getting as much as they can out of the existing workforce, and they’re strapped now,” says Ryan Sweet, a senior economist at Moody’s Analytics Inc. in West Chester, Penn. “They recognize that they can’t grow their business without adding to their workforce.” 

Economists’ estimates in the Bloomberg survey ranged from a decline of 3.5% to a gain of 0.3%. Productivity in the third quarter was revised up from a previously reported 2.9% gain. 

First-time claims for unemployment insurance payments fell last week, returning to levels seen in the second half of 2012, another report from the Labor Department showed Thursday. 

Jobless claims 

Applications for jobless benefits dropped 5,000 to 366,000 in the week which ended Saturday. Economists forecast 360,000 claims, according to the median of 53 estimates in a Bloomberg survey. 

For all of 2012, productivity climbed 1% after a 0.7% gain the prior year. The advance was less than half the 2.3% average from 2000 through 2011. 

The increase in fourth-quarter labor expenses followed a 2.3% drop in the prior three months. Unit labor costs, which are adjusted for efficiency gains, were forecast to rise 3%, according to the Bloomberg survey median.

For all of 2012, labor costs increased 0.7% following a 2% gain a year earlier. They climbed an average of 1% from 2000 through 2011. 

Output rose at a 0.1% rate in the fourth quarter after jumping 4.7% the prior quarter. 

Hours worked climbed at a 2.2% pace after a 1.5% gain. 

Manufacturers fared better than other businesses last quarter as they eked out a gain in efficiency. Productivity increased at a 0.5% rate after it fell 0.9% from July through September. 

The drop in total U.S. productivity was largely a result of special or one-time events that led to a contraction in the economy last quarter, and a jump in labor costs, economists say. Gross domestic product fell at a 0.1 percent annual rate from October to December, after rising at a 3.1 percent pace in the third quarter, according to Commerce Department data last week. 

Consumer spending and business investment accelerated, the GDP report also showed, even as defense outlays posted the biggest drop in 40 years and stockpiles were built at a slower pace, in part reflecting the damage from Superstorm Sandy.

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