U.S. productivity soars 9.5 percent

U.S. companies increased their output in the third quarter even as they slashed working hours, driving productivity up at a 9.5 percent annual rate in the quarter, the Labor Department estimated Thursday.

Unit labor costs - a key measure of inflation - dropped at a 5.2 percent annual rate in the quarter.

Productivity is output divided by hours worked. Output rose 4 percent annualized, while hours worked plunged 5 percent. Real hourly compensation increased at a 0.2 percent annual rate.

With productivity high and real compensation low, companies captured the lion's share of the benefits of higher productivity in the form of profits. Inflationary pressures remained very low.

The huge increase in productivity explains why the U.S. economy could grow at a 3.5 percent annual rate in the third quarter even as jobs were being lost at a rapid pace.

But some economists believe companies have squeezed just about all the extra work they can out of their remaining work force and that more hours of work will have to be put in if output is to increase much more.

In the second quarter, productivity increased at an upwardly revised 6.9 percent annual rate. Unit labor costs fell a revised 6.1 percent in the second quarter.

The 9.5 percent increase in productivity in the third quarter was the highest in six years, and was better than the 7.3 percent expected by economists surveyed by MarketWatch. The decline in unit labor costs was also more than the 4.6 percent expected.

In manufacturing, the gains were more impressive, with productivity surging at a record 13.6 percent annual rate. Unit labor costs in manufacturing fell 7.1 percent.

In the past year, productivity is up 4.3 percent, the best increase since 2003. In the past year, hours worked have fallen a record 7.5 percent, while output is down 3.5 percent.

Unit labor costs have fallen 3.6 percent in the past year, the most on record dating back to 1948, which explains how profits could rise during a severe recession.

Unit labor costs, as the name implies, measure the cost of the labor needed to produce one "unit" of output, whether it is tons of steel, or pages of legal briefs written.

Productivity, a concept that's simple in theory but elusive in practice, is output divided by hours worked. Productivity gains are the key to higher living standards, higher wages, increased profits and low inflation.

After undergoing a productivity boom in the late 1990s, productivity slowed heading into the recession, rising 1.8 percent in 2007 and 2008.

The concept of productivity is difficult to measure, especially in financial services where the concept of a "unit" of output is murky.

That's why the Federal Reserve and other policymakers pay especially close attention to nonfinancial productivity, which increased at a 6.6 percent pace in the second quarter. Those figures for the third quarter will be released Dec. 3.

In a separate report, the Labor Department said initial jobless claims fell by 20,000 to a seasonally adjusted 512,000 last week. However, total benefits, including extended federal benefits, rose by 136,000 to 9.53 million, not seasonally adjusted.