- The Washington Times - Friday, November 3, 2000

ASSOCIATED PRESS

A key measure of American workers' productivity grew at a healthy though considerably slower pace in the third quarter, while labor costs picked up.

That and other reports released yesterday showing an indicator of economic activity unchanged in September and disappointing sales by major retailers in October added to mounting evidence that the nation's economy is slowing to a more sustainable pace, analysts said.

Productivity the amount of output per hour of work rose at an annual rate of 3.8 percent during the July-September quarter after a sizzling 6.1 percent rate of growth posted in the second quarter, the Labor Department said.

While third-quarter productivity growth was the slowest since the beginning of the year, the gain exceeded many analysts' expectations.

"There was nothing bad about the productivity gain of 3.8 percent … in almost any historical context, 3.8 percent gains in output per hour are very solid," said David Orr, chief economist for First Union.

Labor Secretary Alexis M. Herman, an adviser to the Democratic presidential contender Vice President Al Gore, called the third quarter's productivity performance spectacular. "Once again, American workers show their economic muscle."

Unit labor costs, a key gauge of inflation pressures, rose by a rate of 2.5 percent in the third quarter, more than economists expected, after falling at a 0.2 percent rate in the second quarter.

The third-quarter increase in labor costs marked the biggest jump since a 4.3 percent rate in the second quarter of 1999. But economists didn't find that worrisome.

To discern trends, economists often look at labor costs and productivity growth over a longer period. Over the last 12 months, which smooth out quarterly fluctuations, labor costs rose a tiny 0.1 percent, while productivity grew by a robust 5 percent.

"Over the prior year, unit labor costs are essentially unchanged. You just don't get inflation out of that mix," said Merrill Lynch economist Stan Shipley.

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.

In other signs of a moderating economy, the New York-based Conference Board said its Index of Leading Economic Indicators, a key measure of U.S. economic activity, was unchanged in September at 105.7.

And, in another report, the nation's largest retailers largely posted lackluster sales in October. Department stores were stymied by heavy markdowns that eroded profits. Stock-market volatility, rising fuel prices and slower consumer spending continued to plague merchants.

The Federal Reserve has boosted interest rates six times since June 1999 with the goal of slowing the economy enough to keep inflation in check but not so much as to cause a recession. Many economists believe the Fed will leave interest rates unchanged at its Nov. 15 meeting and said Thursday's reports would support that notion.

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. If productivity falters, however, pressures for higher wages could force companies to raise their prices sharply, thus triggering inflation.

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.

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.

In a fourth report, new claims for state unemployment benefits last week was unchanged from the previous week at a seasonally adjusted 308,000, suggesting that the labor market, while loosening around the edges over the last few months, remains tight.

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