Productivity up at fastest pace in 2 years

Output up, costs fell for labor, report says

December 07, 2005|By NEW YORK TIMES NEWS SERVICE

WASHINGTON -- Productivity rose at its fastest pace in two years in the third quarter, far more quickly than was earlier estimated, as output rose and labor costs fell, the government reported yesterday.

The report eased some economists' fears of rising inflation.

Productivity, a measure of how much the economy produced per hour of work, rose 4.7 percent outside the farming sector from July to September, compared with an earlier reading of 4.1 percent, the Labor Department said. Real hourly compensation, which adjusts wages and other benefits for inflation, fell 1.4 percent.

Also yesterday, the Commerce Department said factory orders bounced back in October, rising 2.2 percent, from a decline of 1.4 percent the month before. And the National Association of Realtors said an index that measures pending sales of existing homes fell 3.2 percent after a decrease of 1 percent in September, providing more evidence of a housing slowdown.

Unit labor costs, which gauge the compensation required to produce one unit of output, fell 1 percent in the quarter, twice as much as previously expected.

The Labor Department's report indicates that the productivity boom of the past several years might have more steam remaining than Federal Reserve Chairman Alan Greenspan and other economists believed. Typically, productivity tends to slow in the latter part of an economic expansion because businesses have realized most of the efficiencies from their operations and have to compete more aggressively for a thinning supply of employees by paying them more.

For workers, the report shows that the rise in energy costs has wiped away any advantage they received in the form of higher wages, at least for a time. Before adjusting for inflation, hourly compensation rose 3.7 percent.

Compared with the third quarter of 2004, productivity in the most recent quarter grew at a rate of 3.1 percent, real hourly compensation rose 1.2 percent and unit labor costs were up 1.8 percent.

Some economists said the report allays concerns about broader inflation outside of the recent spike in energy prices, which, in the case of gasoline, have fallen back down.

"What this tells us in terms of the fundamentals is the road looks fine," said Brian Bethune, an economist at Global Insight, a research firm.

Bethune said a tamer inflation outlook should prompt the Fed to stop raising short-term interest rates soon after Ben S. Bernanke takes over from Greenspan as chairman in February. The benchmark federal funds rate on overnight bank loans is now 4 percent, and analysts expect it will reach 4.75 before the Fed stops its increases.

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