Surprising U.S. productivity growth holds down inflation

WASHINGTON -- U.S. companies' productivity grew more briskly in the summer than previously thought and orders to factories rose in October for the first time in three months, suggesting the struggling economy will avoid falling into a new recession.

Productivity, the output per hour of work, grew at a sizzling annual rate of 5.1 percent in the third quarter, the Labor Department reported Wednesday.

The performance was even better than the 4 percent growth rate estimated a month ago and represented a rebound from the tepid 1.7 percent pace in the second quarter.

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 economy through low interest rates.

Separately, factory orders rose 1.5 percent in October after falling in both August and September, the Commerce Department said. That provided a dose of good news for the nation's manufacturers, who have been trying to get through a late-summer rough patch.

Big-ticket manufactured goods, including cars and household appliances, posted a 2.4 percent increase in October and "nondurable" goods, such as clothes and food, rose 0.6 percent.

"The reports show that the economy by no means will go into a double dip recession," said economist Clifford Waldman of Waldman Associates. "Consumers have enough energy to stay alive and keep the economy going because wages are growing at a healthy clip."

Wall Street dips

But on Wall Street stocks dipped on profit warnings from Disney and Hewlett-Packard. The Dow Jones industrial average closed down 5.08 points at 8,737.85.

Gains in productivity are a crucial ingredient to the economy's long-term vitality. Healthy productivity increases allow the economy to grow faster without triggering inflation. Businesses are able to pay workers more without raising prices, which would eat up those wage gains. Strong productivity also helps lift companies' profits.

For the 12 months ending September, productivity grew at a 5.6 percent pace, the strongest showing since 1973.

Gross domestic product -- considered the best measure of the nation's economic health -- grew at a brisk 4 percent pace in the third quarter. But analysts are predicting the summer spurt will be followed by a winter lull. Analysts are forecasting a fourth-quarter economic growth rate of just more than 1 percent.

Wanting to strengthen the recovery, the Federal Reserve last month cut a key interest rate to a 41-year low of 1.25 percent. It marked the first rate reduction of this year and the 12th since January 2001. Analysts believe the Fed will hold rates at that low level at its next meeting next Tuesday.

Companies kept work forces lean in the third quarter, producing more with existing workers.

Workers got paid for their efficiency. Hourly compensation, adjusted for inflation, jumped at a 3 percent rate, the biggest increase since the third quarter of 2000 and a huge improvement over the 0.5 percent rate in the second quarter of this year.

"One of the reasons the economy is still chugging along is that consumers are still enjoying gains in real income," said Ken Mayland, president of ClearView Economics.

The rise in third-quarter productivity helped to push down unit labor costs, good news for companies trying to control costs to boost profits. Unit labor costs fell at an annual rate of 0.2 percent in the third quarter, compared with a 2.2 percent growth rate in the second quarter.

Economists believe companies, concerned about a possible war with Iraq and other economic uncertainties, will keep work forces lean. That means the nation's unemployment rate will probably rise to 5.8 percent in November from October's 5.7 percent, they said. The government will release November's employment report Friday.

"The dark side of those productivity gains is a stagnant job market in the near term," said Merrill Lynch economist Stan Shipley. But a recovery in corporate profits "will ultimately lead to job growth," he added.