Productivity rise is fastest in 2 decades

9.4% rate for quarter called sign of recovery

Economic news stirs Wall Street

Analysts predict demand will spark strong hiring

December 04, 2003|By Bill Atkinson | Bill Atkinson,SUN STAFF

Productivity, a key measure of the amount of worker output per hour, increased at a blistering 9.4 percent annual rate in the third quarter, the fastest pace in two decades, the Labor Department reported yesterday.

That good economic news had Wall Street humming and could well set the stage for a pickup in hiring by companies that have thus far kept their work forces lean because of concern over the strength of the recovery.

The productivity number, which was revised upward from a previously reported 8.1 percent, will likely fall to a more normal 2 percent pace in coming months, economists said.

Still, analysts said recent strong gains will almost certainly lead to higher employment over time.

"Big jumps like this are signs of a turning economy," said Gary D. Keith, regional economist at M&T Bank in Buffalo, N.Y. "There is no doubt about it that productivity is the story of the economy in the last two years. It is setting the stage for the recovery that we are going to see."

Stephen L. Stanley, senior market economist at RBS Greenwich Capital in Greenwich, Conn., expects companies to hasten their hiring as they strain to keep up with demand.

"Employment growth is going to continue to accelerate from here, and then we are going to have some pretty strong employment gains next year," he predicted.

The stock market surged on the productivity news. The Nasdaq composite index briefly crossed the 2000 level for the first time in nearly two years before closing at 1960.25, down 19.82 points, in a late selloff.

The Dow Jones industrial average rose 19.78 points, to 9,873.42. The Standard & Poor's 500 stock index closed down 1.89 points at 1,064.73.

There was a second positive report yesterday. The Institute for Supply Management said the nation's huge service sector, which includes health care, transportation, finance and insurance, continued to grow.

The pace weakened slightly in November with 60.1 percent of the members surveyed reporting growth, down from 64.7 percent in October. Any number above 50 signals expansion.

The next important indicator will come tomorrow, when the Labor Department releases payroll numbers. Over the past three months, companies have added a total of 286,000 new jobs to their payrolls. Economists expect companies to have added about 150,000 in November.

"I think you are going to see more strong employment growth going forward," said David A. Wyss, chief economist at Standard & Poor's in New York.

Analysts said they were heartened by the economy's recent momentum.

Corporate profits are soaring; unemployment has slipped to 6 percent from 6.4 percent in June; and gross domestic product, the value of goods and services produced in the United States, rose at an 8.2 percent annual rate in the third quarter, a full point above the 7.2 percent estimate a month ago.

The economy is expected to continue to move forward strongly in the fourth quarter - possibly as much as 5 percent - and to continue growing well into next year at a more modest 3 to 4 percent annual rate.

"We are seeing the handoff from ... special or temporary factors to more sustainable ones," said Stanley.

The Bush administration's tax cut and a boom in mortgage refinancing have helped propel the recovery, Stanley said. "A lot of those ... forces are still in place," he said. "People are going to get bigger tax refunds next year."

Businesses are also gaining confidence, he said: "It seems like things are starting to fire on all cylinders."

That creates the potential for dealing with the single troubling counterpoint to the recent economic gains - a stubbornly high unemployment rate.

As the economy continues to improve and demand increases for products and services, companies will be forced to hire and the unemployment rate will drop below its current 6 percent, experts said.

So far, companies have been able to avoid the added costs of hiring thanks to recent sharp increases in productivity. Unit labor costs - the amount of money spent to produce each unit of goods or services - decreased at an annual rate of 5.8 percent in the third quarter, the Labor Department reported yesterday.

"Firms are now using their existing labor force very efficiently," Keith said. "They have weaned a lot of the excess labor costs out of the system. What they have now is a much more lean and efficient ... machine than going into the recession."

Keith said that as demand increases companies will have to either hire or invest in equipment to be more productive.

"One way or another, I think the employment picture will start to improve," he said. "It has been an extended dry spell."

Not everyone is sure the labor markets are about to open.

Dean Baker, co-director at the Center for Economic and Policy Research, an independent economic think-tank in Washington, worries that the economy could slip back into recession.

"We are in a good phase, but I think it is going to be short-lived," he said.

Baker acknowledged that the economy has looked good in recent months, but he believes consumers will be tapped out.

"I am not sure they have enough to keep them going through December," he said. "I think the housing bubble is going to burst at some point. That will be a very big hit for the economy. In some way, it will be more difficult than the stock bubble."

Economists believe that for President Bush to win a second term, the economy must continue to improve and the unemployment rate must drop.

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