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U.S. productivity grows
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February 6, 2002: 9:37 a.m. ET
4Q productivity surges, helping set the stage for stronger economic growth.
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NEW YORK (CNN/Money) - U.S. productivity growth surged in the fourth quarter, the government said Wednesday, helping set the stage for a long-term return to stronger economic growth.
The Labor Department said productivity grew 3.5 percent in the fourth quarter after growing 1.1 percent in the third quarter. Economists surveyed by Briefing.com expected productivity growth of 3.1 percent.
"Businesses have responded rapidly to the economic climate, showing the dynamic nature of the U.S. economy, and it's very good for the long-term outlook," Anthony Crescenzi, bond market strategist at Miller, Tabak & Co. told CNNfn's Before Hours program.
The Federal Reserve watches productivity, defined in this case as output per labor hour, as an indicator of inflation, since producers can keep their prices down if they produce goods at low cost. If inflation were a risk, it would reduce the Fed's freedom to cut interest rates as it sees fit to stimulate the economy.
Though productivity doesn't generate economic growth on its own, it does enable the economy to grow more freely at lower interest rates without fear of inflation. Fed Chairman Alan Greenspan and others attributed the strong economic growth of the 1990s in part to higher productivity.
"You can really think of productivity as magic fairy dust to sprinkle over growth to allow growth without inflation," said Brown Brothers Harriman economist Lara Rhame. "That's really the way the Fed sees it."
Productivity also generally raises standards of living - although much of the productivity growth in the fourth quarter derived from cutting labor hours through job cuts, which could crimp consumer demand. Worker hours dropped 3.6 percent in the quarter after falling 3.4 percent in the third quarter.
For the full year 2001, worker hours fell 0.9 percent, the first such decline since 1992, when the economy was recovering from the 1990-91 recession. The falling hours reflect a surge in unemployment that could continue even as the economy recovers.
Unit labor costs fell 1.1 percent in the quarter - the first such decline since a 2.9-percent drop in the fourth quarter of 1999 - after jumping 2.6 percent in the third quarter.
For the entire year, productivity grew just 1.8 percent, compared with 3.3 percent in 2000. It was the worst year for productivity since 1995, when productivity grew just 0.9 percent.
U.S. stock prices fell Wednesday morning, giving up their opening gains, while Treasury bond prices were mostly lower.
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To keep consumers spending despite a recession that some economists think began in March 2001, the Fed cut its target for short-term interest rates 11 times in 2001 to levels not seen in 40 years. It recently decided to leave rates alone, as recent data have indicated that a recovery could be on the way.
Particularly encouraging to many economists, the long-suffering manufacturing sector appears to be getting rid of its glut of unsold goods, the leftovers from a spending boom in the late 1990s. When the boom went bust, it led to a recession in manufacturing that's lasted for more than a year.
At the recent World Economic Forum, however, a great many corporate executives, including Microsoft Corp. (MSFT: Research, Estimates) Chairman Bill Gates, were much more pessimistic about the prospects for recovery, thinking demand will not jump enough to merit an increase in production.
"It's always been very important to listen to CEOs," Rhame said. "When you've got guys that run companies nervous about demand, they put off investing." 
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