WASHINGTON, United States — WORKER productivity in the United States dropped this spring for the first time in more than a year, a sign that companies may need to step up hiring if they hope to grow.

Productivity declined at an annual rate of 0.9 per cent in the April-to-June quarter after posting large gains throughout 2009, the Labour Department said yesterday. Unit labour costs edged up 0.2 per cent in the second quarter, the first increase since the spring of 2009.

Output of US workers is the key ingredient to boosting living standards. It allows companies to pay workers more because of the increased production without being forced to raise the cost of their goods, which sparks inflation.

In most cases, a slip in productivity would be a troubling sign for the economy. But some analysts believe a short-term drop is needed to boost the recovery. That’s because it could be a signal that employers can no longer squeeze extra output out of leaner staffs.

“This could be a turning point as far as hiring goes,” said Joel Naroff, president of Naroff Economic Advisors

Companies cut their payrolls during the recession and relied on fewer workers. For all of 2009, productivity shot up 3.5 per cent, the best performance in six years.

However, over the two years of the recession, 8.4 million jobs were lost. Unemployment hit a high of 10.1 per cent last fall and is now at 9.5 per cent.

Economists believe companies need to stop slashing their work forces and start rehiring laid off workers. That will boost incomes and give households the support they need to increase consumer spending, which accounts for 70 per cent of economic activity. And that would ultimately lead to more demand for those companies’ products.

“Economists often tout the long-run benefits of strong productivity growth, but given the precarious state of the economy, a little more employment, even at the expense of productivity, would likely be helpful in the near term,” said Sal Guatieri, senior economist at BMO Capital Markets.

Stocks retreated yesterday as investors grew more cautious ahead of an announcement on interest rate policies later Tuesday by the Federal Reserve.

A second economic report yesterday showed that inventories held by wholesale businesses edged up only a slight 0.1 per cent in June while sales fell 0.7 per cent.

It was the second consecutive drop in sales at the wholesale level and the biggest decline in 15 months. It raised worries about whether demand may be faltering, a development which could cause businesses to cut back on their restocking and act as a further drag on

the economy.

A slowing in productivity and a rise in unit labour costs will not raise worries about inflation in the current environment because inflation pressures at the moment are non-existent.

In fact, some analysts believe the bigger threat is the possibility of deflation, a destabilising bout of falling prices and wages.

The 0.9 per cent drop in productivity in the second quarter was the first decline since a 0.1 per cent dip in the fourth quarter of 2008. It was the biggest fall since a 1.3 per cent decrease in the third quarter of 2008.

The 0.2 per cent rise in unit labour costs followed a 3.7 per cent plunge in labour costs in the first quarter. It was the first increase since a 0.6 per cent rise in the second quarter of last year.