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U.S. productivity jumps
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November 7, 2001: 1:45 a.m. ET
Measure rises as companies faced with slowing economy cut worker hours.
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NEW YORK (CNNmoney) - Productivity rose at the fastest rate in more than a year in the United States in the third quarter, the government said Wednesday, as businesses cut back workers' hours with the world's biggest economy teetering on the edge of a recession.
Productivity, a measure of worker output per hour, rose at a 2.7 percent annual rate in the quarter, the Labor Department reported, compared with a revised 2.2 percent rate in the second quarter. Economists surveyed by Briefing.com expected a productivity rate of 2.0 percent.
Workers' hours fell 3.6 percent, the biggest drop since a 4.6 percent drop in the first quarter of 1991, at the end of the last recession. It was the highest growth rate since a 6.3 percent gain in the second quarter of 2000.
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CNNfn's Deborah Marchini takes a look at productivity numbers.
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"Solid productivity gains are helping to restrain inflationary pressures," said Steven Wood, economist with FinancialOxygen. "However, because the recent improvements are due to a dramatic reduction in work hours, they reflect the deep trouble the economy is in."
The slowing economy dragged down output by 1.0 percent, the biggest decrease since the first quarter of 1993. But that was more than offset by the sharp decrease in the number of worker hours. Companies, in other words, are getting more production out of fewer workers, a good sign for future productivity gains.
U.S. stock prices rose in midday trading, while U.S. Treasury bond prices extended Tuesday's gains.
Many economists think the economy is again in a recession, commonly defined as two consecutive quarters of shrinking gross domestic product (GDP). The economy shrank at a 0.4 percent rate in the third quarter - the worst performance in more than a decade - and the fourth quarter is expected to be even worse.
To combat the slowdown, the Federal Reserve has cut interest rates a record-tying 10 times this year, slashing its target for short-term rates to 2.0 percent from 6.5 percent. It is widely expected to cut again after its next policy meeting on Dec. 11.
"With good productivity growth and low inflation, the [Fed] has room to lower rates even further, if needed," Wood said.
Productivity is closely watched by Fed Chairman Alan Greenspan and is seen as key to rising living standards. That's because if workers produce more per hour companies can sell more, boost profits and raise wages at the same time without raising prices. If productivity falters, pressures for higher wages could force companies to raise prices, worsening inflation.
For more on the Fed rate cuts, click here
Still, the rise in third-quarter productivity came largely as employers cut hundreds of thousands of jobs in response to a slowing economy. In October, the unemployment rate swelled to 5.4 percent and businesses cut 415,000 jobs, the most in 21 years.
The Fed, President Bush and Congress - which is crafting a multi-billion-dollar stimulus package - are all trying to boost consumer spending, which fuels two-thirds of the economy. Consumer confidence was sagging even before the Sept. 11 attacks and has fallen dramatically since, and analysts say spending certainly won't improve with people worried about the economy and their jobs.
Economists - and the Fed - believe productivity will also suffer in the near term as businesses divert time and attention to security issues after the attacks. But Wednesday's report bodes well for future productivity and indicates inflation will not be a hamper to possible further rate cuts by the Fed.
Click here for CNNmoney.com's economic calendar
Unit labor costs, a closely watched gauge of wage pressures, rose 1.8 percent in the third quarter, down from a 2.6 percent gain in the second quarter. It was the smallest gain in unit labor costs since a 1.2 percent gain in the second quarter of 2000.
"It's a great picture, it reduces unit labor cost growth, which improves the inflation outlook. Awesome," said Ian Morris, chief U.S. economist at HSBC Securities. 
- from staff and wire reports
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