Productivity of workers jumps 4.1% Unemployment claims decline

inflation in hand

Low rates can continue

Consumer prices heading for smallest gain in a decade

The economy

December 05, 1997|By BLOOMBERG NEWS

WASHINGTON -- U.S. worker productivity in the third quarter posted its biggest gain in five years and new unemployment benefit claims unexpectedly declined last week, economic reports showed yesterday in evidence that jobs remain abundant while inflation stays low.

Nonfarm productivity -- a measure of the time and effort of providing goods and services -- rose 4.1 percent at an annual rate in the period from July through September. That's the biggest gain since the fourth quarter of 1992 and just short of the initial third-quarter estimate of a 4.5 percent increase.

Productivity gains are crucial if businesses want to hold down prices to stay competitive. Providing the trend continues, "interest rates can remain at low levels," said William Sullivan, an economist at Dean Witter Securities in New York.

The productivity report, in particular, "removes any pressure on the Federal Reserve to raise interest rates," Sullivan said.

Meanwhile, first-time jobless claims fell by 3,000 in the week ended Nov. 29 to a seasonally adjusted 303,000, the second consecutive weekly decline. More evidence of a strong job market is expected in tomorrow's employment report for November.

In financial markets yesterday, the Treasury's benchmark 30-year bond fell 3/8 point, pushing up its yield almost 3 basis points to 6.04 percent.

The bond's yield had earlier fallen as low as 5.99 percent -- the lowest since January 1996. The Dow Jones industrial average rose 18 points, or 0.23 percent, to close at 8,050.16. The Standard & Poor's index of 500 stocks fell 4 points or 0.38 percent, to close at 973.10.

The Labor Department also reported that unit labor costs fell 0.2 percent in the third quarter. That's up just a bit from an initial estimate of a 0.3 percent drop in unit labor costs for the quarter. Hourly wages adjusted for inflation rose 1.9 percent in the third quarter, down from the initial estimate of a 2.1 percent gain.

Throughout the 1990s, businesses have been able to prevent their profit margins from eroding -- without raising prices -- by squeezing efficiencies out of workers and investing in equipment and computers.

"The drop in unit labor costs was instrumental in boosting corporate profits and holding down inflation in the third quarter," said Lynn Reaser, chief economist at Barnett Banks in Jacksonville, Florida.

This year, consumer prices are on track to post their smallest gain in a decade. Through October, the consumer price index rose at a 1.8 percent annual pace, the slowest increase since 1986, thanks to cheaper imports, lower commodity prices, slower growth in medical costs, and gains in productivity.

Moreover, the cost of employee benefits could be poised to rise in the new year.

In a speech yesterday, Michael Moskow, president of the Federal Reserve Bank of Chicago, warned that that could be one force that drives inflation higher next year.

"We're beginning to see reports that employer costs for health benefits may rise more rapidly next year," Moskow said in Evanston, Ill. "For example, one report indicated that firms will face HMO rate increases that are twice what they were in 1997."

Pub Date: 12/05/97

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