Ahead of the Bell: Productivity, labor costs

WASHINGTON - Economists expect productivity posted another sizzling advance in the July-September period while labor pressures plunged, a combination that will bolster companies' profits but continue to squeeze workers whose incomes stagnated during the recession.

Economists surveyed by Thomson Reuters expect productivity rose at a 6.4 percent annual rate in the third quarter, nearly matching the 6.6 percent increase in the second quarter. That was the biggest quarterly gain in six years.

Unit labor costs likely dropped at an annual rate of 4 percent, after a 5.9 percent plunge in the second quarter.

The Labor Department is scheduled to release the report at 8:30 a.m. EST Thursday.

It's typical for productivity to surge at the end of a recession as businesses continue to aggressively cut costs even as output starts to rebound.

Productivity, the amount of output per hour of work, is the key ingredient to rising living standards. It allows companies to pay their workers higher wages with the increases financed by the increased output rather than higher costs for products.

Companies recently have boosted output while laying off workers in the face of slumping demand. Fewer workers making more goods translates into stronger productivity. The falling labor costs also reflect that many workers still fortunate enough to have jobs have seen their wages squeezed as companies struggle to bolster their bottom lines.

The overall economy, as measured by the gross domestic product, grew at an annual rate of 3.5 percent in the July-September quarter, the first increase in output after a record four straight declines that covered the longest recession since the 1930s.

While economists believe the recession has ended, the unemployment rate likely will keep rising until next summer. The jobless rate hit a 26-year high of 9.8 percent in September and economists predict it will edge up to 9.9 percent when the October number is released on Friday.

Many analysts expect the jobless rate could rise as high as 10.5 percent before the recovery gains enough steam to start pushing it down next summer.

Layoffs have continued this week. Microsoft Corp. said it was cutting 800 more jobs at its facilities worldwide. That comes on top of the 5,000 layoffs the software giant announced in January.

Sprint Nextel Corp., the nation's third largest wireless provider, said it planned to trim "dozens" of jobs from its wholesale division amid a drop in customers.

The concern is that with unemployment rising and companies continuing to squeeze wages for their remaining workers, households may not have the resources to keep spending. Consumer spending accounts for 70 percent of total economic activity, so if it falters in coming months, overall growth could follow.

However, the Federal Reserve is expected to guard against that threat. Fed officials wrapped up a two-day meeting on Wednesday by again repeating that they will keep interest rates low for an "extended period," a commitment they can make because wage and general inflation pressures have vanished during the steep downturn.

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