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Tue, May 30, 2000
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Productivity Surges in Fourth Quarter
to Best Showing in Seven Years

By Jeannine Aversa   Associated Press
WASHINGTON — The efficiency of American workers surged at a 6.4 percent rate in the final three months of 1999, marking the strongest jump in productivity growth in seven years, the government reported today.

That revised estimate pushed productivity growth for all of last year to 3 percent, slightly better than the government previously thought. It was the best showing on workers' efficiency gains since a 4.1 percent increase in 1992.

The surge in fourth-quarter productivity — defined as the amount of output for each hour of work — was stronger than the 5 percent annual rate of growth the Labor Department reported one month ago. The government had initially pegged fourth-quarter productivity at a 4.3 percent rate.

The new fourth-quarter estimate marked the biggest leap in productivity growth since a 7.4 percent rate of increase at the end of 1992. It also was in line with the 6.5 percent rate many analysts were forecasting.

In the third quarter, productivity grew at a sizzling 5 percent rate.

Economists consider healthy productivity gains the key to prosperity and rising living standards. Sizable gains means companies can pay employees more, hold the line on prices and still deliver increased profits to shareholders. Computers, satellites and other technological advances are credited with helping to boost workers' productivity.

After booming in the 1950s and 1960s, productivity went into a two-decade slump following the first Arab oil embargo in 1973. The recent upturn in productivity since 1996 has left some analysts believing that huge business investments in computers are finally beginning to pay off and the country is in a new economic era that will be marked by stronger productivity gains.

If productivity falters, however, pressures for higher wages could force companies to raise their prices sharply, thus triggering inflation.

For the fourth quarter, unit labor costs — a key barometer of underlying inflation pressures — fell by a 2.5 percent rate, the steepest decline since a 3.9 percent rate of decrease in the fourth quarter of 1992. That means the costs of producing a particular piece of merchandise fell.

For the year, unit labor costs rose 1.7 percent, the slowest pace since a 1.6 percent increase in 1997.

The revised fourth-quarter estimate was an even better showing on unit labor costs than the 1 percent rate of decline the government previously estimated and the 2 percent drop some economists were expecting.

In the third quarter, unit labor costs fell by a 0.3 percent rate.

The performance of unit labor costs is important because the bulk of U.S. companies' expenses involve paying for wages, benefits and other labor-related items.

The Federal Reserve bumped up interest rates four times since June to slow the sizzling economy and keep inflation at bay. Given the outlook for strong continuing growth, most analysts widely expect the central bank to boost rates again on March 21.

On Monday, Fed Chairman Alan Greenspan expressed new worries about an overheated economy and sounded a warning that interest rates will be headed higher if the economy doesn't slow. Blue chip stocks plunged.

Still, Greenspan said Americans are living through remarkable economic times with a strong surge in workers' productivity helping to boost incomes and keep inflation from being a problem. The current expansion became the longest in U.S. history at 107 months in February and this month is celebrating its ninth birthday.

"Our immediate goal at the Federal Reserve should be to encourage the economic and financial conditions that will best foster the technological innovation and investment that spur structural productivity growth," Greenspan said in a speech Monday.

Greenspan said he didn't see any signs that the solid gains in productivity growth will peter out any time soon.

But even if the gains in productivity continue, they could have a downside for the economy by pushing soaring stock prices even higher, Greenspan said. The Wall Street boom has contributed to the surge in consumer demand as investors have spent their stock gains with abandon.

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