Hourly output on the job is up

U.S. worker productivity rose at the strongest pace in four years in the third quarter, pushing labor costs down, the government said Wednesday in a report offering comfort to the inflation-wary Federal Reserve.

Nonfarm productivity, or hourly output per worker, increased at a 4.9% annual rate in the third quarter, the Labor Department said, well ahead of Wall Street forecasts.

It was the strongest growth in productivity since a 10.4% surge in the third quarter of 2003 and was more than double the revised 2.2% gain posted during the second quarter.

“It’s a positive signal for growth and it also shows less inflationary pressure. It’s very encouraging for the Fed,” said economist Michelle Meyer of Lehman Bros. in New York.

The increase in productivity more than offset a rise in hourly compensation, which grew at a 4.7% annual rate, up from 4.4% in the second quarter, and pushed unit labor costs -- a gauge of inflation and profit pressures -- down at a 0.2% pace, the first drop in more than a year.

Strong productivity growth should help ease price pressures, and the latest report suggested that a slowdown that had been in evidence might not have been as sharp as some analysts had feared.

Over the last 12 months, nonfarm productivity grew 2.4%, the fastest gain since the first quarter of 2005, the Labor Department said.

A separate report from the Commerce Department showed that inventories of unsold goods at U.S. wholesalers rose a larger-than-expected 0.8% in September while sales jumped 1.3%.

The inventory-to-sales ratio -- a gauge of how long it would take to deplete existing stocks at the current sales pace -- fell to a record low 1.10 months’ worth in September from 1.11 months in August.

Lean inventories can be a good sign for future growth because businesses would have to ramp up production to meet any pickup in demand. However, they also can signal that businesses expect weak demand.

The productivity report showed that although nonfarm output rose at a 4.3% annual rate, the number of hours worked by employees shrank at a 0.5% pace. It was the sharpest decline in hours worked since a 1.3% drop in the second quarter of 2003.