U.S. Productivity Best In 20 Years

Productivity of U.S. companies rocketed at a 9.4 percent annual rate in the third quarter, the best showing in 20 years, offering an encouraging sign that the economic resurgence will be lasting.

The increase in productivity — the amount an employee produces per hour of work — reported by the Labor Department on Wednesday was even stronger than the 8.1 percent pace initially estimated for the July-to-September quarter a month ago. It was up from a 7 percent growth rate posted in the second quarter.

"Productivity is closest thing to a free lunch that the economy provides, in that it expands supply [and] keeps inflation down," Merrill Lynch senior economist Martin Mauro told CBS Radio News. "Companies have been spending more on capital equipment and they have been producing more efficiently."

"The booming productivity gains are translating into better profits, which are now inducing businesses to expand activities — namely investing and hiring," added Mark Zandi, chief economist at Economy.com. "The report suggests that the economic expansion that is now unfolding will be solid and durable."

The third-quarter's productivity gain, based on more complete data, was better than the 9.2 percent growth rate economists were forecasting and marked the strongest performance since the second quarter of 1983, when productivity grew at a blistering 9.7 percent rate.

The report raised new hopes that businesses may be more confident than before that the economic rebound is genuine.

For the economy's long-term health and for rising living standards, productivity gains are vital. They allow the economy to grow faster without triggering inflation. Companies can pay workers more without raising prices, which would eat up those wage gains. And, productivity can bolster a company's profitability.

That's particularly important in the current economic climate. As profits improve, companies may be more willing to boost capital investment and hiring — two crucial ingredients to the economy's sustained recovery.

"Until recently we've been getting solid productivity but no job gains but that's been changing recently in that companies have been beginning to hire people as well," said Mauro.

The nation's payrolls are expected to grow in November for the fourth month in a row by around 150,000, economists predict. The government will release the employment report for November on Friday.

Businesses in the third quarter pumped out more and actually increased workers' hours, compared with a long string of quarters where hours were either cut or were flat.

Companies' output in the third quarter surged at a 10.3 percent rate, the biggest increase since the third quarter of 1983. That was better than the 8.8 percent growth rate previously estimated for the third quarter and up from a 4.6 percent pace in the second quarter.

Workers' hours, meanwhile, increased at a 0.8 percent rate in the third quarter, the best showing since the first quarter of 2000. That was stronger than the 0.7 percent growth rate first estimated and better than the 2.2 percent rate of decline registered in the second quarter.

Companies' unit labor costs fell at a rate of 5.8 percent in the third quarter, boding well for profit margins. That was better than the 4.6 percent rate of decline previously estimated for the third quarter and the 3.2 percent rate of decline reported for the second quarter.

Economists said the increase in workers' hours may be a harbinger of stronger job creation in the months ahead. Businesses, economists said, may be running out of ways to squeeze more out of existing workers in order to meet customers' demands for goods and services.

With the job market improving and the economy gaining traction, economists believe the Federal Reserve will hold a key short-term interest rate at a 45-year low of 1 percent at its next meeting Dec. 9.