Nonfarm Productivity +2.7% 3Q -- +2.2% 2Q
Unit Labor Costs +1.8% 3Q -- +2.6% 2Q
Hourly Compensation +4.5% 3Q -- +4.8% 2Q
By Joseph Rebello Of DOW JONES NEWSWIRES
WASHINGTON (Dow Jones)--U.S. workers grew more productive in the third quarter even as the economy shrank, sign that the country should enjoy a resumption of fast growth and low inflation once the current downturn ends.
Non-farm business productivity grew at a seasonally adjusted annual rate of 2.7% from July through September, the Labor Department said Tuesday. That marked the fastest growth in more than a year. It slowed the growth of unit labor costs, suggesting that inflation will remain in check once the economy starts to recover next year.
The acceleration in productivity growth surprised Wall Street, which had expected an increase of just 2.1%, according to a consensus forecast of economists surveyed by Dow Jones Newswires and CNBC. It suggested a brightening outlook for U.S. corporate profits. Stock prices are likely to rise as a result on Wednesday.
An increase in productivity tends to reduce the risk of inflation and boost corporate profits. Because workers produce more goods per hour, employers can afford to pay them higher wages without raising prices. In the third quarter, unit labor cost grew 1.8%, down from a 2.6% rate in the first quarter. Over the 12 months through September, unit labor costs grew 3.9%.
Fed Chairman Alan Greenspan has often said that the durability of the productivity surge that underpinned the economic boom of the late 1990s would be tested in a downturn. Productivity typically declines during an economic slowdown. A sustained slump would reduce the economy's capacity for non-inflationary growth and limit the Fed's ability to cut interest rates.
Fears of such a slump have grown since the terrorist attacks of Sept. 11, which prompted big increases in both public and private expenditures security. Some economists have said the new emphasis on security will reduce the financial resources the country has available for more productive purposes. The Fed, however, has said that risk exists only in the short run.
"Although the necessary reallocation of resources to enhance security may restrain advances in productivity for a time, the long-term prospects for productivity growth and the economy remain favorable and should become evident once the unusual forces restraining demand abate," Fed policymakers said Tuesday.
The Labor Department latest data appeared to validate Greenspan's view that productivity growth will be robust in the long run - even if the growth rate is smaller than it was in the late 1990s. As the economic downturn deepened this year, productivity growth actually accelerated. Some economists said the acceleration suggested that the capital investment boom of the late 1990s - which became a bust last year - continues to benefit the economy.
Given the benign outlook for productivity and inflation, investors widely expect the Fed to keep cutting interest rates at least through the end of the year. The Fed cut its key federal funds rate by half a percentage point to 2% Tuesday and said it may cut the rate again soon. Some economists expect the funds rate to drop to 1.5% by year-end, which should be enough, they said, to ensure a strong economic recovery in the second half of 2002.
The Labor Department said its data didn't fully reflect the effect of the terrorist attacks, because "the tragic events of Sept. 11 occurred late in the reference period for the productivity and cost measures." It said "it is not possible to separately identify the impacts of the attacks on the productivity and cost measures." Still, it made an adjustment to its estimate of hours worked by business employees, lowering it by 0.3 percentage point to address statistical problems that arose from the terrorist attacks.
The department said the acceleration in productivity in the third quarter was the result of a steep drop in the number of hours worked by employees of non-farm businesses. Those hours dropped 3.6%, marking the biggest decline in more than 10 years. The decline more than offset the 1% decline in the output of U.S. workers, boosting productivity. Average hourly compensation for employees of non-farm businesses grew 4.5%, down from 4.8% in the second quarter.
Manufacturers of durable goods enjoyed the biggest productivity gains during the quarter. Labor productivity among such companies increased 2.5%, up 1.6% in the third quarter. Overall, the manufacturing sector saw a productivity gain of 1.1%, compared with 0.9% increase in the second quarter.
Productivity gains were more impressive in the non-financial corporate sector, which Fed Chairman Alan Greenspan has called a "more accurate" gauge of general productivity trends. The government said productivity in that sector rose 3.4% in the second quarter, the latest quarter for which such data are available. That compared with a 0.6% increase in the second quarter. The number of hours worked by employees of non-financial companies fell by 2.5% while unit labor costs for such companies grew 2.7%.