Output Jumps as Jobs Are Reduced

American businesses last quarter enjoyed their biggest productivity gain in more than a year, the federal government reported Wednesday. But companies achieved that advance by firing thousands of employees and slashing work hours during a declining economy.

Productivity at nonfarm businesses grew at an annual rate of 2.7% from July through September. That was up from 2.2% the previous quarter and the strongest performance since the unusually big 6.3% increase in the second quarter of 2000. Productivity, a key measure of business efficiency, gauges the amount of economic output per hour of work.

Last quarter’s increase defied the traditional pattern of sinking productivity soon after economic output begins to fall. It also raised some hopes that the national economy will start recovering from its current slump sometime next year.

The increase in productivity shows that businesses “are managing things very aggressively” by resorting to layoffs and work schedule cutbacks, said Mickey D. Levy, the New York-based chief economist for the Bank of America.

Ordinarily, he said, productivity weakens when the economy starts to falter because businesses’ work loads tend to decline before layoffs begin. As a result, employees for a time are left with less work to do.

Levy acknowledged that last quarter’s swift cutbacks--the reduction in hours was the steepest in a decade--have been painful for many workers. But he said the payroll-slashing and productivity gains also have spared businesses from even sharper profit declines and could help speed rehiring and an overall recovery.

Still, there is no assurance that productivity gains will continue. The government’s productivity gauge often swings erratically. Last year, for example, productivity advanced a strong 3%, but during the year the results ranged from a decline of 0.6% in the first quarter to the 6.3% advance the next quarter.

Sometimes productivity improves because new technology enables businesses to accomplish more work with fewer employees. The surge in productivity over the last few years was widely attributed to advances in technology, an attribute of the so-called new economy.

Although higher productivity normally is regarded as a boon for the economy, it also can make businesses so efficient that they don’t need to hire new workers, warned Christian Weller, an economist with the Economic Policy Institute, a liberal think tank in Washington. He said that could mean the U.S. unemployment rate, which rose to 5.4% in October from 4.9% in September, could keep climbing.

Wednesday’s report from the Labor Department, however, also provided workers with some good news: hourly compensation, after discounting the effect of inflation, climbed at a rate of 3.8% in the last quarter. That was up from 1.7% in the second quarter and the biggest gain since the last quarter of last year, when real hourly compensation rose 5.8%.

Wednesday’s news followed a string of grim economic reports. Last week, the government reported that 415,000 jobs were eliminated in October, the biggest one-month drop in 21 years.

In addition, the overall economy, as measured by the gross domestic product, shrank at a 0.4% rate in the third quarter. Many economists expect a deeper decline this quarter. That would signal the onset of recession, which commonly is defined as two consecutive quarters of shrinking output.

But economists such as Levy and Rajeev Dhawan, director of Georgia State University’s Economic Forecasting Center, said the latest productivity report suggests that the anticipated recession could be short.

Dhawan said a continuing string of productivity gains “would mean that the economy is below trend not because of any fundamental problems” but largely because of a decline in consumer confidence, particularly since the Sept. 11 terrorist attacks.

And if consumer confidence is the key problem, Dhawan said, it might quickly be turned around by continuing interest-rate cuts by the Federal Reserve and possible fiscal stimulus in the form of tax cuts or extra spending by the federal government.

“The big issue is, will the fiscal stimulus come in time to make use of the existing productivity gains?” he said. “If a fiscal stimulus comes into play in the next three to six months, the chances of recovery are much higher.”