U.S. Productivity Rises at Fastest Pace in 5 Years

The nation’s productivity, a key factor in ensuring continued prosperity for Americans, surged at an annual rate of 4.5% last quarter, its fastest pace in five years, the government reported Thursday.

Analysts said the preliminary estimate, nearly double the 2.4% annual rate recorded in the period from April to June, suggests that the economy is unlikely to be plagued by new inflation any time soon, despite increasing wage pressures.

Moreover, productivity in manufacturing industries soared at a 9.8% annual rate, the largest gain for that sector since 1982, up from a 2.8% annual rate in the April-June quarter.

The figures came as Federal Reserve Chairman Alan Greenspan told Congress that the turmoil in Asian financial markets has had only a modest effect on the U.S. economy, but he warned that the damage could grow if the slide is prolonged.

In testimony before the House Banking and Financial Services Committee, the Fed chairman said the continued health of the U.S. economy “will depend heavily on stability being restored as soon as possible” to Asian markets.

Economists hailed the news of the third-quarter surge in productivity. David A. Wyss of Standard & Poor’s/DRI, an economic forecasting firm, called the increase “good news all around” for continued strong economic growth.

Sluggish productivity growth has been a frustrating problem in the United States for almost two decades and has been a major obstacle to achieving a higher growth rate in the U.S. economy.

During the past 20 years, productivity--a measure of output per hour of work, or worker efficiency--has been growing at a scant 1% a year, half the pace of the 1960s and too slowly to be a major factor in mitigating inflation.

Partly because of this, the Federal Reserve Board has kept a taut rein on money and credit policies to help restrain inflation, most recently seeking to limit the growth of the economy to between 2.5% and 3% a year.

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Some economists have argued that productivity figures have been understating the actual increase because they were not taking into account the effect of new technology in making businesses more efficient.

In their view, such a “hidden” increase in productivity would explain why inflation has remained low at the same time that the economy has been growing rapidly and there are labor shortages in many key industries.

Economists were divided, however, over whether Thursday’s figures were an aberration or the start of a trend toward a “new economy” that can accommodate faster growth without the threat of more inflation.

Allen Sinai of Primark Decision Economics Inc. in Boston, hailed the new figures as evidence of “a delay in the benefits of new technology” in boosting efficiency throughout the economy.

He said that while productivity increases in future quarters may not be quite as high as the 4.5% annual rate recorded from July through September, “I don’t think it’s a transitory phenomenon.”

But DRI’s Wyss disagreed.

“Our guess is that it’s not sustainable and that we’re going to go back to the old trend-line,” he said. “I don’t think this is the start of the so-called new economy that some people have been talking about.”

The figures came just a day after the Federal Reserve Board’s policy-setting Open Market Committee voted to leave interest rates unchanged, despite intensifying labor shortages in the economy.

Although the panel did not elaborate on the reasons for its action, private analysts said policymakers were worried that an interest rate rise in the United States might worsen the turmoil in Asian markets.

On Thursday, the Open Market Committee made public the minutes of its Sept. 30 meeting showing that its vote then to hold interest rates steady was unanimous, despite widespread fears that inflation might be ready to accelerate.

Thursday’s report on productivity showed that the strong rise in output per work hour sent unit labor costs falling at a 0.3% annual rate for the first time since 1994, easing pressures on inflation.

Separately, the Labor Department said first-time claims for unemployment insurance fell by 6,000 last week, to 310,000, which is the 10th straight week that they were below 320,000. It is also a sign of continuing payroll growth.

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Financial markets appeared to shrug off all these developments. After falling sharply Wednesday, the Dow Jones industrial average rose 86.44 points Thursday to close at 7,487.76.

Greenspan’s testimony reiterated an assessment he gave Congress two weeks ago of the Asian turmoil. Deputy Treasury Secretary Lawrence Summers, who testified with Greenspan on Thursday, offered similar views.

Greenspan suggested again that while the turmoil in Asian markets could slow economic growth in the United States modestly over the next few months, it also is likely to keep inflation in check by reducing import prices.