WASHINGTON -- U.S. worker productivity grew four times faster than first estimated in the second quarter, leading to the smallest gain in labor costs in three years and keeping the economy on its low-inflation track, government figures yesterday showed.
Productivity, a measure of the time and effort needed to produce goods and services, rose at a 2.7 percent annual rate in the second quarter, according to the Labor Department. The agency initially estimated a month ago that productivity rose 0.6 percent in the quarter.
Yesterday's report "provides ammunition for those who argue the economy can grow faster than is widely believed," said James Glassman and Madeline Strobing, analysts with Chase Securities Inc. in New York, in a market commentary.
Indeed, a separate Commerce Department report yesterday suggested growth could pick up as inventories of goods at U.S. wholesalers dropped in July while sales unexpectedly rose. Wholesale inventories fell 0.6 percent -- the first drop since April -- a seasonally adjusted $262.457 billion as stocks of autos, machinery and groceries declined. Wholesale sales rose 0.5 percent to $211.884 billion.
Taken together, the reports suggest prices in the United States may remain tame as the economy powers ahead. One reason: "Increases in productivity are the only way businesses can boost their bottom line," since they effectively can't raise prices in the current competitive climate, said Anthony Chan, an economist at Banc One Investment Advisors in Columbus, Ohio.
Reflecting the benefits of strong productivity growth, unit labor costs rose at just a 0.5 percent annual rate in the second quarter -- not the 2.4 percent initially estimated. That's the most benign showing since a decline of 0.2 percent in 1994's second quarter.
"You're seeing a more productive work force," said Kevin Flanagan, an economist at Dean Witter Securities in New York. That view is reinforced by the second-quarter productivity gain, the largest since a 3.3 percent increase in the fourth quarter of 1993 and larger than the first-quarter's gain of 1.8 percent.
Such gains in productivity are crucial for businesses to hold down prices, for workers to increase their standard of living, and for the Federal Reserve to keep interest rates low.
Yesterday's productivity revision brings official government statistics more into line with Fed Chairman Alan Greenspan's contention that the efficiency of American business is accelerating.
Greenspan suggested in a speech Friday that he believes the government understates productivity gains in the U.S. economy. "If data on profits and prices are even approximately accurate, it is difficult to avoid the conclusion that output per hour has to be rising at a pace significantly in excess" of the reported 1 percent annual rise in business productivity, he said.
On financial markets yesterday, stocks rose and bonds fell after the dollar's biggest decline against the Japanese yen in a month on worries about new trade tension between the two nations. The Dow Jones industrial average rose nearly 17 points to close at 7851.91. The Treasury's benchmark 30-year bond fell an eighth, pushing up its yield a basis point to 6.62 percent. The dollar was quoted at 118.97 Japanese yen, down 2.18 yen from Monday.
For all of 1996, U.S. productivity rose 1.3 percent, up from a 0.2 percent rise a year earlier, Labor Department figures show.