Productivity Grows at 3.8 Pct. Rate

Thursday, November 2nd 2000, 12:00 am
By: News On 6

WASHINGTON (AP) — Americans' productivity, a key measure of rising living standards, grew at a 3.8 percent annual rate in the third quarter, the slowest pace since the beginning of the year. Inflation pressures rose.

Growth in productivity — the amount of output per hour of work — during the July-September quarter was weaker than the breakneck 6.1 percent rate of growth for the second quarter, the Labor Department reported Thursday.

Another report showed further evidence that the economy has cooled from its red-hot pace registered earlier in the year.

The Index of Leading Economic Indicators, a key measure of U.S. economic activity, was unchanged in September at 105.7 after declining in the four previous months, the New York-based Conference Board said. The latest reading on the index matched analysts' expectations.

On Wall Street, stocks rose as buyers snapped up financial and technology issues. The Dow Jones industrial average gained 10 points and the Nasdaq 82 points in morning trading.

The third-quarter productivity performance was still better than many analysts were expecting. They were predicting productivity growth, which is seasonally adjusted, at a 3.0 percent annual rate.

Even with the moderation, economists say productivity growth in the range of a 3 percent rate or higher is still quite healthy. The third-quarter performance marked the slowest growth in productivity since a 1.9 percent rate of increase in the first quarter of this year.

Unit labor costs, a key gauge of inflation pressures, rose by a rate of 2.5 percent in the third quarter, the strongest pace since a 4.3 percent rate of increase in the second quarter of 1999.

In the second quarter of this year, unit labor costs fell 0.2 percent. Many analysts were expecting unit labor costs to rise at a rate of 1.9 percent in the third quarter.

Gains in productivity are the key to rising living standards because they allow wages to increase without triggering higher inflation that would eat up those wage gains.

The slowdown in third-quarter productivity reflected the fact that the gross domestic product — the total output of goods and services — also slowed sharply to an annual rate of 2.7 percent in the third quarter, less than half the sizzling 5.6 percent pace in the previous quarter.

Since productivity measures output per worker, when output growth slows dramatically as it did between the second and third quarters, productivity will also slow because the number of workers remained essentially steady during the two quarters.

Productivity has risen by a robust 5.0 percent over the past 12 months, which smoothes out the quarterly fluctuations. Over the same period, unit labor costs have grown by just 0.1 percent.

The Federal Reserve has boosted interest rates six times since June 1999 to slow the economy and keep inflation under control. One of the Fed's chief concerns is that the nation's tight labor market, in which employers are struggling to recruit and retain workers, will trigger wage inflation, added costs that would be passed along to consumers in the form of sharply higher product prices.

In another report, the number of Americans filing new claims for state unemployment benefits last week was unchanged from the previous week at a seasonally adjusted 308,000. Jobless claims for the previous week were revised up from 305,000 to 308,000.

The nation's labor market, while loosening around the edges over the last few months, remains tight. The more stable four-week moving average of claims rose to 309,750 last week, the highest level since Sept. 16.

For two decades, from 1973 to 1995, productivity showed lackluster gains of just over 1 percent. However, since that time productivity increases have more than doubled. If productivity falters, however, pressures for higher wages could force companies to raise their prices sharply, thus triggering inflation.

Fed Chairman Alan Greenspan, in recent speeches, bolstered the view of many economists that the sizable pickup in productivity growth over the last several years represents a lasting structural change in the economy. But at some point, these strong gains inevitably will slow, he has said.