AP
Productivity Surges by 4.9 Percent Rate
Wednesday November 7, 5:13 pm ET
By Martin Crutsinger, AP Economics Writer
US Worker Productivity Surges by 4.9 Percent - Fastest Pace in 4 Years


WASHINGTON (AP) -- Worker productivity surged in the summer at the fastest pace in four years while wage pressures eased.

The Labor Department reported that productivity -- the amount of output per hour of work -- jumped at an annual rate of 4.9 percent in the July-September quarter. That was more than twice the 2.2 percent rise in the second quarter and was the fastest surge in worker efficiency since 2003.

At the same time, wage pressures eased. Unit labor costs dropped at an annual rate of 0.2 percent, the best showing in more than a year.

Both outcomes were far better than expected and should relieve some concerns that a surge in productivity that began in the mid-1990s was in danger of being reversed.

The slight drop in wage pressures was especially welcome after hefty increases over the past four quarters. Rising wages are good for workers. But if higher wages are not accompanied by strong productivity gains, they raise concerns among Fed policymakers about inflation.

The 0.2 percent decline in unit labor costs in the third quarter followed a 2.2 percent increase in the second quarter and jumps of 5.2 percent in the first quarter and 10.3 percent in the fourth quarter of last year.

Wall Street was not impressed with the big rise in productivity and the slowdown in wage pressures, focusing instead on worries about high oil prices and the weakness of the dollar against other currencies. The Dow Jones industrial average fell by 360.92 points, its second big drop in the past week, to close at 13,300.02.

Analysts said the improvement in productivity probably will not last.

Many economists predicted productivity will slow during the next two quarters as overall growth slows, but will start to rebound again in late 2008 and 2009 as the overall economy rebounds.

The economy grew at an annual rate of 3.9 percent in the third quarter, the best showing since early 2006. Analysts are looking for growth to slow to less than half of that rate in the current quarter and in the first three months of 2008.

Brian Bethune, an economist at forecasting firm Global Insight, said the Fed would read the slowdown in labor costs as good news that inflationary pressures from the labor market were not intensifying.

Productivity is the critical ingredient in rising living standards. It allows employers to pay workers higher wages, which are financed by the increased output. That means employers do not have to resort to raising the price of their products, which can lead to higher inflation.

The Fed last week cut a key interest rate for the second time in two months. At the same time, the central bank expressed concerns that inflation remained a problem, especially in light of rising oil prices.

Fed Chairman Ben Bernanke planned to testify Thursday on the economic outlook before Congress' Joint Economic Committee. That testimony will be closely scrutinized for any signs that the Fed may cut rates again should the economy should more signs of faltering.

Economists say that the next six months represent the point of maximum danger that the economy could slip into a recession. Factors include the steepest slump in housing in more than two decades, a severe credit crunch and surging oil prices.