The Federal Reserve board meets today to unscramble the problems in the economy, and the Commerce Department made it a little more difficult this morning.  Two reports show that the economy continues to slow during “Recovery Summer,” as Joe Biden has dubbed this season, and give little hope of any short-term expansion.  First, worker productivity suffered its first drop in five quarters:

Nonfarm business sector labor productivity decreased at a 0.9 percent annual rate during the second quarter of 2010, the U.S. Bureau of Labor Statistics reported today, with output and hours rising 2.6 percent and 3.6 percent, respectively. (All quarterly percent changes in this release are seasonally adjusted annual rates.) The decline in output per hour follows five quarters of strong productivity growth. The second-quarter gain in hours worked was the largest since the first quarter of 2006 when hours rose 4.1 percent. From the second quarter of 2009 to the second quarter of 2010, both productivity and output increased 3.9 percent; hours were unchanged (chart 1, tables A and 2).

The Associated Press attempts to put a little positive spin on this number:

A potential silver lining in the productivity report was the possibility it may soon force more hiring by employers if they have reached the limits of squeezing current workforces.

“If working people longer and harder is no longer bringing large returns to businesses, executives may have to find other ways to expand production,” said economist Joel Naroff of Naroff Economic Advisors in Holland, Pa.

“They might actually have to hire more workers,” he added.

That might be true if demand increases, although that’s arguable; a fall in productivity suggests more potential for production at current workforce levels.  In fact, if demand falls, falling productivity may be a harbinger of workforce reductions, not expansion.

So did demand rise?  Nope:

Separately, the Commerce Department said June wholesale inventories rose slightly by 0.1 percent to $399.2 billion but sales dropped 0.7 percent. Inventory restocking has been a driver of the recovery from the worst recession in decades. But falling sales will do little to encourage stockpiling.

Nor will it be likely to expand dramatically any time soon:

The productivity report showed unit labor costs, a gauge of potential inflation pressures closely watched by the Fed, edged up at a 0.2 percent annual rate after shrinking at a revised 3.7 percent rate in the first three months this year.

But the data pointed to growing pressure on household incomes, which in turn is likely to crimp spending that fuels overall economic activity.

Compensation per hour contracted at a 0.7 percent annual rate in the second quarter and was flat in the first three months of the year.

With compensation falling along with productivity and sales dropping at the wholesale level, don’t expect an expansion in hiring in the near term.  With these numbers, it looks more like some employers may either limit hiring or start trimming again.

Update: Zero Hedge quotes JP Morgan research analyst Michael Feroli as saying that these new numbers show that the actual Q2 GDP growth rate is closer to 1.3% (absent the trade data due tomorrow), not the projected 2.4% announced late last month, emphasis mine:

When the Bureau of Economic Analysis (BEA) prepares their initial estimate for GDP, they need to make assumptions for some of the source data for the last month of the quarter, which is not available at the time of the initial release. Over the ensuing weeks that data becomes available and is incorporated in the revised estimate. When the BEA released their initial estimate of Q2 GDP on July 30th, they made some assumptions about June inventory and international trade data that seemed fairly extreme, with a very large contribution from inventory building, and a very large drag from foreign trade.

So far, BEA’s assumption on June inventories have indeed looked too strong relative to the data. Today’s June data on wholesale inventory building was substantially weaker than what the BEA had assumed, implying a subtraction of 0.4%-point from the initial print of GDP. This follows last week’s June nondurable inventory data, which was also weaker than what BEA had assumed. Altogether, the June data released so far suggests Q2 GDP is tracking closer to a 1.3% annual rate of increase, well below the 2.4% in the initial release. That said, we would be hesitant to say Q2 is looking like 1.3% growth, full stop, because tomorrow’s international trade data for June could lead to yet another change in views on what really happened last quarter, and quite possibly add back some of the GDP that is being taken out by the June inventory data.

Unless the international trade data shows an unexpected surplus, the revision at the end of August looks like a real problem for Democrats.