Productivity rebounds while labor costs decline

WASHINGTON — Productivity showed a modest rebound in the July-September quarter while labor costs fell slightly.

Productivity grew at an annual rate of 1.9 percent in the third quarter, a rebound from a decline of 1.8 percent in the second quarter, the Labor Department reported Thursday. The second quarter decline had been the biggest drop in nearly four years.

Labor costs fell at a 0.1 percent rate in the third quarter after having risen 1.3 percent in the second quarter.

Even with the gain in productivity, the efficiency of U.S. workers is still growing at a much weaker pace than last year. Economists see that as an encouraging sign that companies will have to step up their hiring of laid-off workers.

A rebound in hiring would provide a welcome boost at a time that unemployment remains painfully high.

The 1.9 percent rise in productivity in the third quarter was still well below the 3.5 percent increase turned in for all of 2009, the biggest advance in six years. Productivity is the amount of output per hour of work.

Companies, struggling in the midst of the worst recession since the 1930s, cut payrolls during the recession by 8.4 million jobs from December 2007 to December 2009. Productivity surged as companies were able to produce more with fewer workers. However, economists believe many companies have reached the limit of how much they can stretch their existing work forces.

Unemployment hit a high of 10.1 percent last fall and has come down only slightly since that time. The jobless rate remained stuck at 9.6 percent in September and many economists believe it will show no improvement in October. That report will be released Friday.

If companies increase hiring, that would boost incomes and give households more money to increase spending. Consumer spending accounts for 70 percent of economic activity. Weakness in spending has been a key reason the economy has been growing at sub-par rates over the past year.

While slower productivity and a rise in unit labor costs would normally raise worries about inflation, economists said the bigger concern at the moment is deflation, a painful period of falling prices and wages.

The Federal Reserve on Wednesday announced that it would buy an additional $600 billion in Treasury bonds in an effort to lower interest rates and spur the economy, citing concerns about falling inflation as one of the reasons for the move.

The 0.1 percent dip in unit labor costs in the third quarter followed a 1.3 percent second quarter rise, which had been the first gain in a year. The recession has depressed wages as workers lost bargaining power to demand salary increases.