Productivity skyrockets

The productivity of American workers soared by the largest amount in 20 years last quarter, raising hopes that the economic recovery is taking hold and businesses will step up hiring.

The Labor Department reported yesterday that productivity -- the amount an employee produces per hour of work -- rocketed at an annual rate of 9.4 percent in the July-to-September quarter, the best showing since the second quarter of 1983.

The figure, revised from a month ago based on more complete data, was even stronger than the government's first estimate of an impressive 8.1 percent productivity growth rate and represented an acceleration from the brisk 7 percent pace in the second quarter.

"The gains in productivity are helping companies' bottom lines so they can be less focused on cutting costs and more focused on expanding business and ultimately hiring more employees," said Lynn Reaser, chief economist at Bank of America Capital Management. "This is very good news for the sustainability of the recovery."

On Wall Street, the high-tech dominated Nasdaq Composite Index reached 2,000 and the Dow Jones Industrial Average came within 58 points of 10,000 in the early afternoon before both indexes retreated and closed mixed.

Nasdaq rose as high as 2,001 before falling back to 1,960, down 19.82, or 1 percent. The index, which suffered the worst losses during the bear market of the past few years, had not traded above 2,000 since Jan. 15, 2002.

The Dow, meanwhile, closed up 20, or 0.2 percent, at 9,873.

For the economy's long-term health and for rising living standards, productivity gains are vital. They allow the economy to grow faster without triggering inflation. Companies can pay workers more without raising prices, which would eat up those wage gains, and productivity can bolster a company's profitability.

That is particularly important in the current economic climate. As profits improve, companies may be more willing to boost capital investment and hiring -- two crucial ingredients for the recovery to last.

In terms of productivity, "businesses have probably stretched their current work forces about as far as they can stretch," said Stuart Hoffman, chief economist at PNC Financial Services Group. "If the growth in the economy continues, businesses would be required to add to their staffs, rather than expect current employees to do it all on a going-forward basis."

The economy is estimated to be growing at a solid 4 percent rate in the current quarter. Although that would be a slowdown from the blistering 8.2 percent pace of the third quarter -- the fastest in nearly two decades -- analysts said such economic growth would be ample to spur hiring.

The nation's payrolls are expected to grow in November by around 150,000 workers, economists predict. If that happens, it would mark the fourth month in a row that hiring has increased. The government will release November's employment report tomorrow.

During the economic slump, gains in productivity came at the expense of workers: Companies produced more with fewer employees. But in the third quarter, businesses pumped out more with a small increase in workers. The economy added a net 103,000 jobs during the quarter.

Companies' output in the third quarter surged by 10.3 percent, the biggest increase since the third quarter of 1983, and more than two times the 4.6 percent pace in the second quarter.

Workers' hours in the third quarter increased by 0.8 percent, the most since the first quarter of 2000, and a turnaround from the 2.2 percent rate of decline in the second quarter.

Businesses may be running out of ways to squeeze more out of existing workers to meet customers' demands for goods and services, said Richard Yamarone, economist with Argus Research Corp. "Stronger job creation may be just around the corner," he said.

Companies' unit-labor costs fell at a rate of 5.8 percent in the third quarter -- good news for profit margins. That was better than the 3.2 percent rate of decline reported for the second quarter.

Workers' hourly compensation adjusted for inflation rose at a 0.7 percent rate in the third quarter, down from a 3 percent rate in the previous quarter.

With the job market improving and the economy gaining traction, economists believe the Federal Reserve will hold a key short-term interest rate at a 45-year low of 1 percent at its next meeting on Tuesday. "The odds ... do increasingly favor a revival in job creation," Fed Chairman Alan Greenspan said last month.