Productivity hits fastest pace in 6 years

WASHINGTON -- Productivity surged in the third quarter at the fastest pace in six years while labor costs continued to drop sharply, a combination that will bolster companies' profits but leave workers with stagnant incomes.

The Labor Department said today that productivity, the amount of output per hour of work, was rising at an annual rate of 9.5 percent in the July-September quarter, much better than the 6.4 percent gain economists had expected. Unit labor costs fell at a 5.2 percent rate.

It is typical for productivity to soar in the early stages of an economic recovery as businesses continue to aggressively cut costs even as output rebounds. However, the concern is that the continued squeeze on workers' incomes will depress consumer spending in the months ahead, putting the economic recovery at risk.

The 9.5 percent rise in productivity, which followed a 6.9 percent surge in the second quarter, was the fastest advance since a 9.7 percent increase in the third quarter of 2003.

The third quarter productivity rise reflected the fact that the overall economy, as measured by the gross domestic product, grew for the first time in a year, expanding at an annual rate of 3.5 percent. The higher output came as companies continued to lay off workers, meaning there was more output with fewer employees which translates into higher productivity and lower unit labor costs.

The 5.2 percent drop in unit labor costs in the third quarter marked the third straight decline and was larger than the 4 percent decrease economists were expecting.

Productivity is the key ingredient to rising living standards. It allows companies to pay their workers higher wages with the increases financed by the increased output rather than higher costs for products.

But companies this year, struggling to cope with the longest recession since the 1930s, have boosted output while continuing to lay off workers. The falling labor costs also reflect that many workers still fortunate enough to have jobs have seen their wages squeezed as companies struggle to bolster their bottom lines.

While economists believe the recession has ended, the unemployment rate likely will keep rising until next summer. The jobless rate hit a 26-year high of 9.8 percent in September and economists predict it will edge up to 9.9 percent when the October number is released tomorrow.

Many analysts expect the jobless rate could rise as high as 10.5 percent before the recovery gains enough steam to start pushing it down next summer.

The concern is that consumer spending, which accounts for 70 percent of economic activity, could falter in coming months if households continue to be squeezed by layoffs, stagnant wages and depleted savings.

However, the Federal Reserve pledged at the conclusion of its latest two-day meeting yesterday to continue to keep interest rates low for an "extended period," a commitment they can make because wage and general inflation pressures have vanished during the steep downturn.

Layoffs have continued this week. Microsoft Corp. said it was cutting 800 more jobs at its facilities worldwide. That comes on top of the 5,000 layoffs the software giant announced in January.

Sprint Nextel Corp., the nation's third largest wireless provider, said it planned to trim "dozens" of jobs from its wholesale division amid a drop in customers.

-- The Associated Press