Productivity, or output per worker hour, outside of the farm sector grew at a meager seasonally adjusted annual rate of 0.2 percent in the first quarter after a 1.4 percent growth rate in the fourth quarter of 1997, the Labor Department said.

It was the weakest showing for productivity growth since the summer of 1996, when it fell at a 0.7 percent pace.

The sluggish performance of productivity, which comes as monetary policy-makers prepare to consider interest rate levels, was expected by economists who also foresee a pickup to healthier levels later this year.

"Productivity's been a driving force in the economy for a decade, and we don't see that trailing off here," said economist Gary Thayer of A.G. Edwards & Sons Inc. in St. Louis.

Economists said higher-than-average job growth in the first quarter, spurred in part by an unusually mild winter in much of the country, led to a more rapid acceleration in the number of hours logged by workers than in their hourly output. The result was slower productivity growth.

Productivity gains are essential for non-inflationary economic growth because they allow businesses to boost output at no extra cost, which raises revenues that can increase profits, worker compensation or both.

Meanwhile, the job market showed signs of tightening as the number of Americans filing new claims for jobless benefits slid by 11,000 to 308,000 in the final days of April, the department said in a separate report. The more closely watched four-week average of claims fell to 308,500 in the week ended May 2 from 309,500 in the previous week, it said.

The department Friday is scheduled to issue April's unemployment rate and hiring data. Analysts surveyed by Reuters expect an unchanged jobless rate of 4.7 percent and the addition of 259,000 jobs outside the farm sector after a decline of 36,000 in March.

The jobs and productivity reports will figure prominently in the deliberations of Federal Reserve policy-makers when they meet on May 19 to weigh their next move on interest rates. The central bank has left interest rates unchanged for more than a year amid signs of little or no inflation even in the face of tight labor markets and robust economic growth.

Productivity gains, including 1.9 percent in 1996 and 1.7 percent last year, along with the rise of the global economy have been credited with helping to hold down inflation.

"We have a global economy now, and inflation is being kept in check not just by our productivity gains but also by cheap goods and cheap resources from overseas," said Thayer.

Despite its sluggish showing in the first quarter, productivity still has grown relatively well recently and is likely to continue improving, according to economist Anthony Chan of Banc One Investment Advisors in Columbus, Ohio.

"The main thing to keep in mind here is that the trend for productivity is impressive, given the late stage of this expansion," he said. "From here, believe it or not, productivity becomes better, not worse."

Even though the economy has been growing for more than seven years, businesses are still making relatively large investments in efficiency-enhancing new technology, which will be reflected in future productivity gains, Chan added.

Unit-labor costs, a closely watched inflation gauge, jumped at a 3.8 percent rate in the first quarter, matching its fourth-quarter gain, which was the biggest since a 4 percent rise in the third quarter of 1996, the department said.

The rise in labor costs unsettled the U.S. bond market, helping to push prices lower in morning trading as traders worried that it might prompt the Fed to raise rates.

But some analysts doubted the central bank would increase borrowing costs at the May 19 meeting.

"I don't think these productivity numbers are enough to scare them," said Susan Hering of Carr Futures.

In a separate report, the Commerce Department said higher sales in March helped to slow the growth of wholesale inventories to 0.5 percent from 1.3 percent in February. The growth of wholesale sales nearly doubled in March to 1.1 percent from 0.5 percent, it said.

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