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Productivity Is Strongest in Four Years

Reuters
Wednesday, 7 Nov 2007 | 12:50 PM ET

U.S. worker productivity rose at the strongest pace in four years in the third quarter, pushing labor costs down, the government said Wednesday in a report offering comfort to the inflation-wary Federal Reserve.

Non-farm productivity, or hourly output per worker, increased at a 4.9 percent annual rate in the third quarter, the Labor Department said, well ahead of Wall Street forecasts.

It was the strongest growth in productivity since a 10.4 percent surge in the third quarter of 2003 and was more than double the revised 2.2 percent gain posted during the second quarter.

"It's a positive signal for growth and it also shows less inflationary pressure. It's very encouraging for the Fed," said economist Michelle Meyer of Lehman Brothers in New York.

The increase in productivity more than offset a 4.7 percent rise in compensation and pushed unit labor costs, a gauge of inflation and profit pressures, down at 0.2 percent pace, the first drop in more than a year.

The report, however, failed to lift spirits on Wall Street, where investors fretted about record high oil prices and a slump in the value of the dollar. The blue chip Dow Jones industrial average was down around 150 points in late-morning trade.

The U.S. central bank lowered benchmark interest rates by three-quarters of a percentage point over the past two months to offer support to the economy, which is lumbering under a steep housing downturn and related strains in credit markets.

Prices for U.S. government debt rose on Wednesday as traders best the central bank would be pushed to cut interest rates again, despite reluctance among some policy-makers.

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The Fed has continued to express concern over the potential for inflation, and cited high energy and commodity prices in its last policy announcement. Oil prices on Wednesday set a fresh high above $98 a barrel.

Strong productivity growth should help ease price pressures and the latest report suggested a slowdown that had been in evidence may not have been as sharp as some had feared.

Over the past 12 months, non-farm productivity grew 2.4 percent, the fastest gain since the first quarter of 2005, the department said.

Wholesale Inventories Up

A separate report from the Commerce Department on Wednesday showed inventories of unsold goods at U.S. wholesalers rose a larger-than-expected 0.8 percent in September, while sales jumped 1.3 percent.

The inventory-to-sales ratio, a gauge of how long it would take to deplete existing stocks at the current sales pace, fell to a record low 1.10 months' worth in September from 1.11 months in August.

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Lean inventories can be a good sign for future growth as businesses would have to ramp up production in order to meet any pickup in demand. However, they can also be a signal that businesses expect weak demand.

The productivity report showed that while non-farm output rose at a 4.3 percent annual rate, the number of hours worked by employees shrank at a 0.5 percent pace. It was the sharpest decline in hours worked since a 1.3 percent drop in the second quarter of 2003.

"Businesses have really been focusing on cutting costs, trying to find ways of getting more work out of their work force," said Mark Vitner, senior economist at Wachovia Securities in Charlotte, North Carolina.

Hourly compensation gained at a 4.7 percent rate, up from 4.4 percent in the second quarter. But the department said that after the rise in consumer prices was taken into account, compensation per worker was up a more modest 2.7 percent.

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