Productivity Increase Is Strongest in 2 Years

Orders to U.S. factories increased at a healthy pace in October, and third-quarter productivity shot up by the largest amount in two years.

The two government reports Tuesday provided fresh evidence that the economy is bouncing back from the devastating Gulf Coast hurricanes and the late summer surge in energy prices.

The Commerce Department reported that orders for manufactured goods rose by 2.2% to a seasonally adjusted $399.8 billion in October after a 1.4% September decline that was blamed on disruptions from the hurricanes and a strike at aircraft giant Boeing Co.

Meanwhile, the Labor Department said the productivity of American workers, the biggest factor determining future living standards, rose at an annual rate of 4.7% in the July-September quarter, the best showing in two years.

The stronger increase in productivity, which was revised upward from an initial estimate of 4.1%, helped to push down labor costs, which fell by 1% in the third quarter, double the 0.5% decline initially reported.

The improved productivity and falling labor costs should ease fears at the Federal Reserve that wage pressures will make inflation worse. Fed policymakers, who meet next week, are expected to nudge interest rates up by a quarter-point, the 13th such move since June 2004.

Rising productivity means that companies can pay their workers more because of increased output rather than having to increase the price of their products.

The administration hopes that the recent good economic news will help lift President Bush’s job approval ratings, which have fallen to the lowest levels of his presidency because of the Iraq war and consumer jitters about the economy.

White House spokesman Scott McClellan said the productivity increases over the last five years represented the fastest growth rate in this indicator since World War II. “More often than not, higher productivity means higher wages, something this president is very focused on,” McClellan said.

Despite the strong productivity gains, income growth has lagged behind for middle- and low-income workers, reflecting in part increased competition from low-wage countries as the U.S. trade deficit has soared to record levels.

The increase in productivity to a 4.7% rate reflected the fact that total output in the economy -- the gross domestic product -- was revised upward last week to a growth rate of 4.3%, the best showing since early 2004. Economists said GDP growth probably would have approached 5% without the hurricanes.

Many analysts said they were revising higher their forecasts of overall growth in the October-December quarter in light of the strength shown in recent economic data including Friday’s report that employment grew by 215,000 in November, ending a two-month storm-related lull.