Productivity’s Surge Gives ’98 a Strong Finish

A surge in productivity during the final three months of 1998 helped produce a healthy 2.2% increase in Americans’ output per hour of work last year, the government said Tuesday, in another sign of the economy’s exceptional performance.

The advance in productivity at nonfarm businesses, reported by the Labor Department, marked a significant improvement over the 1.2% gain of 1997 and came close to 1996’s 2.4% rise.

In the fourth quarter, productivity surged at a seasonally adjusted annual rate of 3.7%, the best since the first quarter of 1996. Productivity grew 2.5% in the third quarter, revised from the previously reported 3%.

Economists consider strong productivity gains the key to prosperity and rising living standards. Such improvement means companies can pay employees more, hold the line on prices and still deliver increased profits to shareholders.

In 1998, for instance, inflation-adjusted hourly wages and benefits jumped 2.6%, the largest gain in 12 years.

At the same time, growth in unit labor costs, a key barometer of inflation pressures, slowed. They rose 2% in 1998, compared with 2.3% in 1997.

Productivity, after growing at a nearly 3% rate in the 1960s and early 1970s, slowed to an anemic 1% from 1974 through 1995. Since then, it’s been growing at nearly 2% annually, leading some economists to speculate that the economy has embarked on a new era of productivity growth, driven by computers and other high-tech innovations.

In fact, some believe productivity has recently been even better than the measures reflect because it’s difficult to gauge the output of many services. They say it’s the key factor behind the economy’s ability to produce the lowest unemployment rate in 29 years, the lowest sustained inflation since the 1960s and the longest peacetime stretch of economic growth in history.

At factories--many of them hit hard by the loss of export sales to Asia and other economically struggling parts of the world--productivity still increased a strong 4.3% in 1998, down from a five-year high of 4.9% in 1997.

In the manufacturing of durable goods--items from cars to computers that are expected to last at least three years--productivity surged 6.8%, the most since 1971.

The ability of manufacturers to maintain, and in many cases improve, productivity reflects their determination to operate efficiently in the face of lost sales abroad. That, in turn, has led to the loss of more than 200,000 jobs in the sector since March.

In the fourth quarter, the productivity increase came with a drop in labor costs at a 0.2% rate--the first decline since early 1996--and a 1.5% increase in inflation-adjusted compensation, the smallest in a year and a half.

In manufacturing, fourth-quarter productivity grew at a 5.6% annual rate, the best since 1997.

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Business productivity

Percentage change from previous quarter at annual rate, seasonally adjusted:

4th quarter: 3.7%

Source: Labor Department