Labor productivity growth, which had slowed in the spring, bounced back sharply in the summer to offset most of the rise in labor costs, and thus kept inflation pressures low, the Labor Department reported yesterday.
Meanwhile, the Commerce Department said that a decline in new car sales kept total retail sales unchanged in October following a small drop in the prior month. Earlier the September result had been reported as a small increase.
In an unusually large gain, productivity shot up at a 4.2 percent annual rate. That rise in productivity--the amount of goods and services produced for each hour worked--limited the rise in unit labor costs to only a 0.6 percent rate. Unit labor cost figures show how much of employers' costs of paying their employees has been offset by efficiency gains. Over the past year, productivity at American businesses other than farms was up 2.9 percent, while unit labor costs rose 1.7 percent.
The productivity figures "provide yet additional evidence that the ongoing U.S. economic expansion is exceptional," said economist Joe Liro at Stone & McCarthy Research Associates, a financial markets research firm.
"The third-quarter productivity advance results from an incredible 5.7 percent increase in private sector non-farm output generated by a 1.5 percent increase in private hours worked," Liro said. "The stellar performance . . . should go a long way in postponing the day of reckoning with respect" to the nation's tight labor markets sparking more inflation.
Nevertheless, Stone & McCarthy and other firms, including Goldman Sachs & Co., continued to expect Federal Reserve policymakers to raise their target for overnight interest rates by a quarter-percentage point to 5.5 percent at a meeting Tuesday.
"On the one hand, the logic for tightening monetary policy another notch is compelling to us given the momentum of the economy, the tightness of labor markets and the fact that this is the last good opportunity to tighten monetary policy for a while," said Bill Dudley, chief economist at Goldman Sachs.
"The decision is a very close one, however, and could go either way," Dudley said.
Other analysts agreed that it is a close call but said they thought it would go the other way.
For example, Maury N. Harris, chief economist at PaineWebber Inc. in New York, told his firm's clients, "Reflecting the flattening of recent retail sales coupled with exceptionally strong productivity growth, which raises the Federal Reserve's 'speed limit' for noninflationary growth, we still do not expect the Fed to raise [overnight rates]," although the 0.3 percent October rise in the "core" portion of the producer price index for finished goods "makes our forecast a 'close call.' "
Mickey Levy, chief economist at Bank of America, said the flatness in retail sales for the second month in a row was "a clear sign that the demand side of the economy is slowing in response to Fed tightening earlier in the year."
As for next Tuesday, Levy said, "They ought to tighten, because I think they should take steps to lower inflation to zero. But I place a higher probability on the [Fed] remaining on hold."
In a speech late last month, Fed Chairman Alan Greenspan predicted that some revisions in the gross domestic product estimates from the Commerce Department, along with new ones for the third quarter, would cause upward revisions in productivity growth roughly in line with those reported yesterday.
Even so, Greenspan believes the most accurate figures available are those that cover nonfinancial corporations rather than the entire non-farm business sector.
"I believe data for the nonfinancial corporate sector afford a more accurate, though admittedly more narrow, measure of productivity performance," Greenspan said. "And here the numbers are still more impressive, nearly 3 percent on average over the past five years, and more than 4 percent over the past two. By this measure, productivity growth in the 1970s and 1980s also averaged about 1.75 percent a year.
"Moreover, the acceleration in productivity appears reasonably widespread among nonfinancial corporate firms beyond the high-tech industries themselves, even though gains in output per hour in the advanced technology companies have verged on the awesome."
Revisions in the productivity numbers for nonfinancial corporations through the second quarter of this year released yesterday support Greenspan's conclusion. Figures for the third quarter will be available next month.
Labor productivity rose steeply last quarter.
Percent change, quarterly at an annual rate
3rd quarter: 4.2%
SOURCE: Labor Department