U.S. Productivity Turns Upward in 3rd Quarter : Output: Even though report shows no sign of inflation, analysts still predict a Fed rate hike.

The productivity of American businesses grew at a 2.7% annualized rate in the third quarter, with little sign of inflation in the economy.

The Labor Department said Wednesday that non-farm productivity--output in relation to the hours worked--rebounded from a seasonally adjusted annualized drop of 2.1% in the April-June period. The department had estimated that second-quarter productivity fell 2.5%.

The second-quarter decline was the first since a 2% decline in the first three months of 1993 and was the steepest since a 3.7% plunge in the first quarter of 1989.

The report also says that unit labor costs--typically two-thirds of the cost of a product--inched upward just 0.1%. It was the best showing since labor costs fell 2.4% in the final quarter of 1993.

Unit labor costs had risen 3.1% in the first quarter of 1994 and 2.9% in the following three months.

“Year over year, productivity is growing about 2%,” said economist Stephen S. Roach of Morgan Stanley & Co. “That’s off the recent highs but double the trend of the 1970s and ‘80s. . . . It’s doing a terrific job of limiting cost pressures in the economy.”

The result, Roach added, will be continued low inflation, improving competitiveness in overseas markets and eventual improvement in the American standard of living.

Although the report lacks any sign of inflation, Roach said he agrees with most other economists that the Federal Reserve Board will boost interest rates again when it meets Tuesday.

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The Fed has engineered five increases in short-term rates this year, citing a need to cool economic expansion so it does not kindle price pressure.

The report shows that output climbed at a 3.9% rate in the third quarter, more steeply than the 3.2% advance of three months earlier. At the same time, however, the number of hours worked rose just 1.2%, well off the 5.5% pace from April through June.

A further decline in hourly compensation helped to hold down unit labor costs. Adjusted for inflation, that figure fell 0.7% at an annual rate from July through September--the fifth drop in the last seven quarters.

Manufacturing productivity in the third quarter continued to outpace the overall improvement. It jumped 5.3% at an annual rate, including a 7.1% surge in output and a 1.7% gain in the number of hours worked.

However, the rate was down from 6.9% in the first quarter and 5.7% in the second.

Unit labor costs in manufacturing fell at a 2.1% annual rate, more slowly than the 6.8% drop of three months earlier. Manufacturing encompasses nearly 20% of U.S. business employment.

Total productivity, including farms, rose at a 3.1% rate after falling 2% in the second quarter.