- The Washington Times - Wednesday, August 9, 2000

Americans' productivity surged during the past 12 months at the fastest pace in 17 years while labor costs declined, the first time they have dropped since 1984, the Labor Department reported yesterday.

Both numbers were much better than expected, and the Clinton administration responded by hailing the remarkable combination of positive forces exhibited by a "new economy" bolstered by strong business investment in computers and other productivity-enhancing equipment.

"We are enjoying a splendid combination of strong productivity growth, low unemployment and modest inflation," said Labor Secretary Alexis M. Herman. "Productivity growth is the key to our economic prosperity."

Private economists said the good productivity figures made it highly unlikely that the Federal Reserve will boost interest rates for a seventh time when the central bank meets again Aug. 22.

Productivity, the amount of output per hour of work, increased at an annual rate of 5.3 percent in the April-June quarter, more than double the first quarter's 1.9 percent gain.

Unit labor costs, the salary paid per amount of work, dipped by 0.1 percent at an annual rate in the second quarter after rising by 1.9 percent in the first quarter.

Even more significantly, the changes in both productivity and unit labor costs over the past 12 months, which smoothes out the quarterly fluctuations, were at the best levels in nearly a generation.

Over the year ending in June, productivity for non-farm businesses rose by 5.1 percent, the best 12-month showing since a 5.3 percent rise in the 12 months ending in the third quarter of 1983.

Meanwhile, unit labor costs over the past year fell by 0.4 percent, the first annual drop in this key measurement of wage pressures since 1984.

The productivity improvement was led by a surge in manufacturing productivity, which climbed at an annual rate of 5.1 percent in the second quarter after even bigger gains of 7.9 percent in the first quarter and 10.2 percent in the fourth quarter of last year.

Stan Shipley, a Merrill Lynch economist, called this performance "awesome" and said it indicated that despite the lowest unemployment in three decades, wage pressures are being well contained by advances in productivity.

"You just don't get inflation out of that mix," he said.

Rising productivity is considered the crucial element to boosting living standards because it lets employers pay workers higher salaries, financed by the increased output. Without gains in productivity, employers must cover higher wage costs by raising product prices, which boosts inflation.

After more than two decades of lackluster gains in productivity from 1973 to 1995 averaging 1.4 percent per year, the increases since 1996 have averaged almost double that.

These gains in productivity allowed the Federal Reserve to watch as the unemployment rate fell to levels not seen in three decades without becoming overly concerned about inflation.

Still, there is a debate among economists about how much of the recent productivity gains are permanent and how much have been influenced by temporary factors.

Federal Reserve Chairman Alan Greenspan told Congress in July that question will be decided by what happens in coming months.

Mark Vitner, an economist at First Union in Charlotte, N.C., said much of the second quarter's productivity gain was probably temporary as output soared faster than businesses could find new workers in the tight labor markets.

He predicted productivity gains would slacken off in the second half of this year, causing unit labor costs to rise.

Those developments, he said, would force the Fed to resume raising interest rates in early 2001.

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