U.S. Productivity Increases More Than Forecast

U.S. Productivity Increases More Than Forecast

Dec. 5 (Bloomberg) -- Worker productivity in the U.S. accelerated more than forecast in the third quarter, causing labor costs to drop by the most in four years.

Productivity, a measure of employee efficiency, rose at an annual rate of 6.3 percent, the most since 2003 and up from a 2.2 percent pace in the second quarter, the Labor Department said today in Washington. Labor expenses dropped at a 2 percent pace, also the most since 2003.

Greater efficiency eases pressure for companies to raise prices to counter rising energy costs, diminishing the threat of inflation. Lower labor costs will give Federal Reserve policy makers leeway to reduce interest rates to prevent the economy from slipping into a slowdown that will erode productivity.

``No question that the third quarter went out with a big roar in terms of both growth and productivity,'' said Brian Bethune, director of financial economics at Global Insight Inc. in Lexington, Massachusetts, who correctly forecast the gain. ``Inflation is a diminished threat.''

Economists forecast productivity would accelerate to a 5.9 percent pace, according to the median of 68 projections in a Bloomberg News survey. Projections ranged from increases of 4.9 percent to 6.3 percent. A preliminary estimate last month showed productivity grew at a 4.9 percent rate.

Unit labor costs were expected to drop at a 1.2 percent rate, according to the Bloomberg News survey. Projections for unit labor costs ranged from declines of 0.2 percent to 2.4 percent.

Compensation for each hour worked increased at an annual rate of 4.2 percent in the third quarter, compared with a 1 percent rate in the prior three months.

Greenspan's Favorite

Productivity at non-financial corporations, a measure watched by former Fed Chairman Alan Greenspan, climbed at a 4.2 percent rate in the third quarter, compared with 2.1 percent the previous three months.

Among manufacturers, productivity increased at a 5 percent pace in the last quarter, compared with a gain of 2.4 percent.

The third-quarter increase in productivity reflected the pickup in economic growth. The economy expanded at a 4.9 percent rate last quarter, the most in four years, according to a Commerce Department report last week.

That pace will not be sustained in the current quarter as consumer spending slows, most economists say. Peter Kretzmer, senior economist at Bank of America Corp., is forecasting growth of 0.1 percent in the fourth quarter. That is also likely to pull productivity down.

Rate Cut

Weaker growth and slowing inflation give the Fed room to keep lowering rates. Market futures signal the Fed will cut its benchmark lending rate at its Dec. 11 meeting, its third consecutive decline since September.

Fed Chairman Ben S. Bernanke last week signaled ``renewed turbulence'' in markets may have shifted risks between growth and inflation, cementing speculation the central bank will cut interest rates.

``Uncertainty surrounding the outlook'' is ``even greater than usual,'' requiring the Fed to be ``exceptionally alert and flexible,'' Bernanke said last week.

The Fed on Nov. 20 lowered forecasts for growth next year, in part reflecting the deepening recession in the housing market. Policy makers now expect U.S. gross domestic product to increase between 1.8 percent and 2.5 percent in 2008, ``notably below'' the 2.5 percent to 2.75 percent they predicted in July.

Rebound in Efficiency

Today's report may ease concern that the productivity surge that began in 1996 was waning. Efficiency gains have slowed every year since reaching a peak of 4.1 percent in 2002. Last year, productivity rose just 1 percent, the smallest increase since 1995.

Over the past 12 months, productivity increased 2.7 percent, the most since the second quarter of 2004. Unit labor costs increased 3 percent compared with the third quarter of last year, down from a 4.2 percent year-over-year gain in the previous quarter.

In the late 1990s, Greenspan was one of the first to recognize that productivity was accelerating, and that the improvement could help contain inflation even as the economy strengthened and unemployment stayed low. The realization allowed the Fed to keep interest rates little changed from 1996 to 1999.

Some companies including Citigroup Inc. are cutting staff or slowing the pace of hiring to boost productivity. The Labor Department may report Dec. 7 that 70,000 new jobs were created in November, down from 166,000 in October, according to a Bloomberg survey.

Citigroup, the largest U.S. bank, is reviewing ways to cut costs as it grapples with mortgage writedowns that may lead to the first quarterly loss since at least 1998, spokeswoman Christina Pretto said Nov. 26.

Executives at the bank ``are planning ways in which we can be more efficient and cost-effective to position our businesses in line with economic realities,'' said Pretto.


BLOOMBERG