Labor Costs Decline as Productivity Increases

U.S. worker productivity grew in the third quarter at the fastest rate in nearly seven years, and labor costs fell for the first time in more than two years, a mix that indicates inflation is being kept at bay.

Productivity--as measured in an index of output-per-hour worked--rose at a 4.9% annual rate, revised from an initially reported 4.2% increase, after rising 0.6% for the second quarter, the Labor Department said Tuesday.

Unit labor costs--a measure of worker compensation tied to changes in productivity--fell at a 0.2% rate in the third quarter after rising 4.2% in the second, the Labor Department said. “Both worker compensation and unit labor costs have been slowly receding this year, a major surprise given the incredible tightness in the labor markets,” said Joel Naroff of Naroff Economic Advisors in Holland, Pa.

Productivity is on track to match last year’s 2.8% gain, which would be the best two-year showing since 1991 and 1992, the first years of the current expansion. It also would be the fourth year in a row productivity has grown more than 2%; the last time that happened was from 1961 to 1966.

Compared with the same quarter a year ago, U.S. productivity was 3.1% higher, the Labor Department said. Productivity at nonfinancial corporations, a statistic watched by the Federal Reserve, rose at a 4.7% pace in the third quarter, the biggest increase in a year. At U.S. factories, productivity rose at a 3.9% annual rate.

Companies have invested heavily in computers and other innovations to boost efficiency and cut costs. Fed officials want to see productivity gains continue in order to ensure prices stay in check.

In other economic news:

* Borrowing by U.S. consumers grew by a slower-than-expected $4.2 billion in October as shoppers cut back on credit-card purchases for the first time in nearly a year, the Fed reported. Credit card and other revolving debt declined by $300 million in October, the first drop in that category since November 1998.

* The number of planned job cuts by major U.S. businesses declined 1.4% in November from a year ago, although they are still at a level to keep layoff announcements this year on pace for a decade high, according to Challenger, Gray & Christmas. Planned dismissals in November were up 123% from October, which had the lowest number for job-cut announcements since September 1997, the employment firm said in its monthly survey. November’s figure brings the 1999 total so far to 630,450, or 47,345 behind the total for all of 1998.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Business Productivity

Percentage change from previous quarter at annual rate, seasonally adjusted:3rd quarter: 4.9%

Source: Labor Department