Productivity surged in the third quarter by the largest amount in six years while labor costs fell. While that indicates inflation is remaining under control, it also signals that workers' wages are getting squeezed, raising doubts about the durability of the economic recovery.
The Labor Department said Thursday productivity was rising at an annual rate of 8.1 percent in July-September period, the biggest jump since 2003, while unit labor costs were falling at a 2.5 percent rate.
The productivity gain was revised down from an initial estimate of 9.5 percent made a month ago while the drop in unit labor costs was less than the 5.2 percent plunge first reported. The revisions were larger than economists had expected.
The revisions reflected the fact that the government last week trimmed its estimate for growth in the overall economy from an increase of 3.5 percent for the gross domestic product, down to a smaller rise of 2.8 percent.
GDP is the economy's total output of goods and services. Productivity is the amount of output per hour of work. With a smaller amount of output in the third quarter, the level of productivity fell.
Even with the downward revision, productivity was still rising in the third quarter at a historically rapid pace, helping companies improve their profit outlooks.
The 8.1 percent productivity advance was the biggest quarterly gain since the third quarter of 2003 and it followed a sizable 6.9 percent rise in the second quarter. By contrast, productivity for all of 2008 grew by just 1.8 percent.
Economists believe the outsize gains in productivity in the past two quarters will drop sharply next year as companies exhaust the amount of extra output they can get out of smaller workforces and begin to ramp up hiring.
That development, while dampening productivity, will be good for the overall economy because rising employment is seen as a critical factor needed to make sure that the current recovery does not falter.
Employers, struggling to cope with the longest and deepest recession since the 1930s, have laid off millions of workers. With the unemployment rate already at a 26-year high of 10.2 percent and expected to climb further, the concern is that households will not boost spending significantly, meaning that demand will stagnate and the economic recovery will remain sluggish.
In the third quarter, the 2.5 percent drop in unit labor costs followed a flat reading in the second quarter and a 5 percent plunge in the first three months of this year.
The falling labor costs reflect that workers seeing widespread layoffs have been unable to demand higher wages and in many cases have seen their salaries squeezed as companies struggle to bolster their bottom lines.
Productivity is considered a key ingredient for rising living standards. It lets companies pay their workers higher wages and finance the wage increases by increased output rather than by boosting the cost of their products.
Federal Reserve officials closely watch productivity and labor costs to see if they can detect any threats of future inflation. But in the current weak economy, the Fed has said it plans to keep a key interest rate low for some time to come. In its latest survey of business conditions around the country, the central bank said Wednesday that it found no upward pressure on wages and prices remaining stable, meaning that inflation is remaining under control.
While economists believe the recession has ended, the unemployment rate is expected to keep rising until next summer, possibly climbing to 10.7 percent or even higher. Economists believe when the November jobless figure is released on Friday it will show no change from the 10.2 percent reached in October, but they expect further increases in coming months as layoffs continue.
Gannett Co. this week said it was cutting 26 newsroom jobs at its flagship USA Today newspaper and eliminating 11 positions at USA Weekend magazine. Another media company, the Greenspun Media Group, which publishes the Las Vegas Sun, announced it was reorganizing its operations in a cost-cutting move and would lay off an unspecified number of workers.
(This version CORRECTS source of report to Labor sted Commerce Department)