Nation's productivity grows by 4 percent in third quarter

WASHINGTON -- Productivity, a crucial ingredient in the economy's long-term vitality, grew at a brisk annual rate of 4 percent in the summer. It was the strongest showing since the beginning of this year.

Productivity -- the amount of output per hour of work -- bounced back in the third quarter, after growing by a sluggish 1.7 percent pace in the second quarter of this year, the Labor Department reported Thursday.

Gains in productivity are helping to keep a lid on inflation, an important factor for Federal Reserve policy-makers as they try to energize the sputtering economic recovery.

After holding interest rates at low levels all year long, the Fed slashed a key interest rate by a bold half percentage point on Wednesday, its first rate reduction of this year.

By lowering rates, Fed-policy-makers hope to motivate consumers to spend more and businesses to step up investment, factors which would boost economic growth as the holiday season approaches.

"Productivity is our one strength and our one salvation at this difficult time," said economist Clifford Waldman, president of Waldman Associates. "It should make the Fed breathe a sigh of relief about its decision to cut rates."

Unemployement studied

Separately, new claims for unemployment benefits dropped last week by a seasonally adjusted 20,000 to 390,000, the lowest level since early October, the department said in a separate report. However, the week before, claims jumped by 16,000.

The number of workers continuing to collect unemployment benefits rose to 3.58 million for the work week ending October 26, the most recent period for which the information is available. That figure suggests that not a lot of hiring is going on.

The sluggish labor market, eroding consumer confidence and worries about a possible war with Iraq are making consumers more cautious, something that the Fed's rate cut is intended to address, economists say.

The rise in productivity in the third quarter helped to push down unit labor costs. Unit labor costs rose at only a 0.8 percent rate in the third quarter, down from a 2.2 percent growth rate in the second quarter.

Improved productivity often is a byproduct of a sluggish economy as businesses work existing employees longer hours rather than hiring additional help.

That's particularly crucial to companies as they try to cope with the faltering economic recovery and try to bolster profits, which took a big hit during last year's recession.

Gains in productivity also allow the economy to grow faster without triggering inflation and lets companies pay workers more without raising prices, which would eat up those wage gains.

While the 4 percent rise in productivity was slightly weaker than the 4.2 percent pace many analysts were forecasting, it still marked the best performance since a sizzling 8.6 percent growth rate posted in the first quarter of this year.

For the 12 months ending September, productivity grew at a brisk 5.3 percent pace, representing the strongest showing since the third quarter of 1983. Unit labor costs, meanwhile, dropped by 2 percent.