The Labor Department said Wednesday that productivity grew at an annual rate of 2.9 percent from July through September. That's the fastest pace in two years and higher than the initial estimate of 1.9 percent. Labor costs dropped at a rate of 1.9 percent, more than the 0.1 percent dip initially estimated.
Productivity was revised higher because economic growth was faster in the third quarter than first estimated, while hours worked were unchanged. Productivity is the amount of output per hour of work.
The report suggests companies are finding ways to squeeze more out of their existing workers. While that's a good sign for corporate profits, it can be discouraging for people who want a job.
Still, the trend in productivity has been fairly weak. It has grown only 1.7 percent compared with a year ago. That's half the average growth that companies saw in 2009 and 2010, shortly after many laid off workers to cut costs during the Great Recession. And it's below the long-run growth of 2.2 percent a year dating back to 1947.
So companies may ultimately need to hire more workers if they see only modest gains in productivity and more demand for their products.
Economists predict worker productivity will slow for the rest of this year and through 2013. Higher productivity is typical during and after a recession, they note. Companies tend to shed workers in the face of falling demand and increase output from a smaller work force. Once the economy starts to grow, demand rises and companies eventually must add workers if they want to keep up.
Steven Wood, chief economist at Insight Economists, said the decline in labor cost suggest companies are feeling little pressure to pay workers more. Over the past year, labor costs are up a tiny 0.1 percent. That compares with a 3.9 percent year-over-year gain in the first quarter of 2007, before the Great Recession triggered millions of layoffs and reduced workers' bargaining power.
The Federal Reserve closely monitors productivity and labor costs for any signs that inflation is affecting wages. Mild inflation has allowed the central bank to keep interest rates at record lows in an effort to boost economic growth and fight high unemployment.
The economy grew at a 2.7 percent annual rate in the July-September quarter. That's faster than the 2 percent rate initially estimated and nearly twice the 1.3 percent growth rate in the April-June quarter.
But many economists believe growth is slowing to below 2 percent in the current October-December quarter. That's typically no enough to spur enough hiring to rapidly lower the unemployment rate, which was 7.9 percent last month.
They cite two reasons for the deceleration: Superstorm Sandy disrupted business activity in late October and early November in 24 states. And many consumers and business may be more cautious about spending because of the "fiscal cliff." That's the name for automatic tax increases and spending cuts that are scheduled to take effect in January, unless President Barack Obama and Congress reach a deal before then to avert them.
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