4th-Quarter Productivity Hits 3-Year High

The productivity of American business grew at its fastest rate in three years at the end of 1996, the government said Tuesday, reinforcing the picture of a healthy economy with little upward pressure on inflation.

The Labor Department said productivity outside of the farm sector rose at an annualized rate of 2.2% in the fourth quarter, a sharp improvement from the third quarter, when productivity was flat. It was the largest rise since a 2.8% annualized gain in the fourth quarter of 1993.

The increase slightly exceeded the 2.1% rise predicted by Wall Street economists.

Still, most experts were not surprised by the strength of the number, given the fourth quarter’s strong 4.7% rate of growth in gross domestic product, the broadest measure of the nation’s economy.

“With GDP growth up so strongly, you would expect to see big gains in productivity,” said Joel Naroff, chief bank economist at First Union Corp.

Nevertheless, Naroff and other economists said they view continued gains in productivity, or output per worker per hour, as crucial to ensuring that inflation remains in check.

A pickup in wages amid reports that businesses have encountered some difficulties finding skilled labor have raised concerns about the potential for wage-driven inflation.

The situation has also led to worries that the Federal Reserve, the nation’s central bank, might be forced to raise interest rates in a bid to head off inflation.

But Kathryn Kobe, an economist at Joel Popkin & Co., said, “Increases in productivity would allow the best of both worlds.

“Workers could enjoy wage increases while more efficiency on the part of businesses would prevent them from having to pass along those increases in the form of price rises,” she said.

The stock market, recovering from a pullback by technology issues Monday, ended 51 points higher Tuesday, all of which came in the final 30 minutes of trading. Bond investors had a muted reaction to the productivity report, leaving the benchmark 30-year bond yield unchanged from Monday.

For 1996 as a whole, productivity rose 0.8%, the best performance since a 3.2% rise in 1992 but still slower than the longer-term trend of annual growth of slightly more than 1%.