Jones Lang LaSalle

Productivity Rise Is Fastest in Two Years
By VIKAS BAJAJ

Productivity rose at its fastest pace in two years in the third quarter, far more quickly than earlier predicted, as output rose and labor costs fell, the government reported today.
The report eased some economists' fears of rising inflation.

As a measure of how much the economy produced per hour of work, business productivity rose 4.7 percent outside the farming sector from July to September, compared with an earlier reading of 4.1 percent, the Labor Department reported. Real hourly compensation, which adjusts wages and other benefits for inflation, fell 1.4 percent, unchanged from previous estimates.

Also today, the Commerce Department said factor orders bounced back in October, rising 2.2 percent, from a decline of 1.4 percent the month before. And the National Association of Realtors said an index that measures pending home sales for existing homes fell 3.2 percent after a decrease of 1 percent in September, providing more evidence of a housing slowdown.
The Labor Department's report indicates that the productivity boom of the last several years may have more steam left in it than Alan Greenspan, the Federal Reserve chairman, and other economists believed. Typically, productivity tends to slow in the latter parts of an economic expansion because businesses have wrung out most of the efficiencies from their operations and have to compete more aggressively for a thinning supply of employees.

For workers, however, the report shows that the rise in energy costs wiped away any advantage they received in the form of higher wages, at least for a time. Before adjusting for inflation, hourly compensation rose 3.7 percent.

Unit labor costs, which gauge how much compensation it takes to produce one unit of output, fell 1 percent in the quarter, twice as much as previously expected.

From 2000 to 2004, productivity gains averaged 3.28 percent a year, far higher than the average of 2.14 percent for the last 45 years. Those gains are one of the mains reasons cited by Mr. Greenspan and other policy makers for the ability of the United States economy to achieve long periods of growth in recent years without causing significant inflation.

Compared with the third quarter of 2004, productivity in the most recent quarter grew at a rate of 3.1 percent, real hourly compensation rose 1.2 percent and unit labor costs were up 1.8 percent, much closer to the recent trend.

Some economists noted that the report allays concerns about broader inflation outside of the recent spike in energy prices, which in the case of gasoline prices have already fallen back down.
"What this tells us is in terms of the fundamentals the road looks fine," said Brian Bethune, an economist at Global Insight, a research firm. "It doesn't look like there are a lot of hazards on the way."

Investors appeared to agree with that assessment; the Standard & Poor's 500-stock index was up 9.60 points, to 1,271.68, around midday.

Mr. Bethune said a tamer inflation outlook should prompt the Federal Reserve to stop raising short-term interest rates soon after Ben S. Bernanke takes over from Mr. Greenspan as chairman in February. The benchmark federal funds rate on overnight bank loans sits at 4 percent today, and analysts expect it will reach 4.75 before the Fed stops.