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U.S. Productivity Surges

Cost-cutting by businesses is paying off in the highest productivity growth in more than 29 years.

In the third quarter, output per hour worked in the non-farm business sector rose at a 5.1 percent annual rate, the Labor Department said Wednesday, revising last month's estimate of 4.0 percent. Read the full release.

Unit labor costs fell 0.2 percent, compared with a gain of 0.8 percent estimated a month ago. Productivity growth rose 1.1 percent in the second quarter and 8.6 percent in the first. It averaged 1.1 percent in 2001 and 2.9 percent in 2000.

Over the past year, productivity in the non-farm sector rose 5.6 percent, the highest since the first quarter of 1973. Economists figure productivity can grow about 2 to 3 percent in the long run.

Productivity growth is the key economic variable. Faster growth means higher standards of living, higher wages and higher profits. Robust gains in productivity can keep prices down. Unfortunately, quarterly measures of productivity are erratic, volatile and misleading at best.

Economists are divided about productivity trends. Some say advances in high technology and business methods have led to a new era in productivity that is allowing the economy to grow faster than in the anemic late 1970s and 1980s. Others say the estimates are too high and that the current streak of productivity gains is merely a reflection of the business cycle.

In the non-financial sector, productivity rose 5.7 percent as output rose 4.3 percent and hours worked fell 1.3 percent. Hours worked in the non-financial sector have dropped eight quarters in a row.

Some economists focus on trends in the non-financial sector, because productivity in finance is particularly cloudy. Over the past year, productivity in non-financial businesses has risen 6.7 percent.

In the manufacturing sector, productivity rose 5.5 percent as output rose 3.2 percent and hours worked fell 2.2 percent. Unit labor costs dropped 1 percent.

The government reported last week that the gross domestic product - considered the best measure of the nation's economic health - grew at a brisk 4 percent pace in the third quarter. That was stronger than the 3.1 percent growth rate first estimated.

But analysts are predicting the summer boom will be followed by a winter lull. Analysts are forecasting a fourth-quarter economic growth rate of around just more than 1 percent.

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