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3Q productivity surges
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December 7, 1999: 11:35 a.m. ET
Revised figure up 4.9% to 7-year high while labor costs decline 0.2%
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NEW YORK (CNNfn) - U.S. worker productivity rose in the third quarter at the fastest pace in nearly seven years while wage costs contracted, the government reported Tuesday, suggesting inflation isn’t posing a threat to the near-record U.S. economic expansion.
Productivity surged 4.9 percent in the third quarter, in line with expectations and above the 4.2-percent increase initially reported by the Labor Department. Labor costs, meantime, contracted 0.2 percent in the July-September period, also in line with forecasts and well below the 0.6 percent gain originally calculated.
The productivity gain was the biggest since a 7.4 percent jump in the fourth quarter of 1992, while the decline in unit labor costs was the largest since a 0.6 percent drop in the second quarter of 1997, the Labor Department said. Compared to the same quarter a year earlier, productivity rose at a 3.1 percent pace.
"When you stand back and think about what’s going on, this is a stunning performance,” said Jim Glassman, a senior economist at Chase Manhattan. "What it means is that, with productivity rising, companies can keep their costs down.”
Stable wage gains
The Labor Department last week reported modest job creation in November, along with tame wage gains, setting the stage for the U.S. economy to set a record for its longest period of expansion ever. The U.S. unemployment rate currently rests at a 29-year low of 4.1 percent.
Analysts and economists attributed the stellar employment gains and stable wages to a huge increase in worker productivity. Rising productivity can help keep inflation in check by allowing businesses to boost their output of goods and services without increasing their labor costs.
Click here for the Labor Department’s detailed report on third-quarter productivity
A big contributor of that has been technology, which has allowed people to work more efficiently and companies to streamline their operations, reducing costs and keeping a lid on prices.
Companies have invested heavily in computers, automated assembly lines and other improvements to boost efficiency and reduce costs. After resting around the 1-percent level in the 1970s and ‘80s, U.S. productivity growth has remained above 2 percent in the past three years.
Massive investment into those types of technologies has helped explain why the U.S. economy has continued to expand at a stronger-than-usual pace without triggering the typical acceleration in inflation.
Holding the line?
For financial markets, the report offered little surprise since both numbers matched analysts’ expectations. For the Federal Reserve, though, the report could potentially be enough of a catalyst to hold the line on interest rates.
The Fed raised short-term interest rates by a quarter point last month -- the third increase this year -- in an effort to slow the economy and keep inflation under wraps. It lifted its trend-setting Fed funds rate to 5.5 percent from 5.25 percent.
Fed officials next meet Dec. 21, just before Christmas and New Year’s. Because the meeting is so near the holidays, few analysts expect the Fed to raise rates again. The central bank’s next meeting after that is in early February.
In manufacturing, productivity rose 3.9 percent, up from an initial reading of 3.4 percent. Productivity at non-financial companies, a figure said to be scrutinized by Federal Reserve policy makers, advanced at a 4.7 percent pace in the third quarter, the biggest increase in a year.
Worker productivity measures the time and effort workers exert to provide goods and services, while unit labor costs measure how workers are compensated for their labor. Productivity is on track to grow by 2.8 percent this year, the same as in 1998. Since the beginning of 1997, productivity has grown an average annual rate of 2.6 percent. 
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