Workers' productivity, a key to national economic vitality, grew at the fastest rate in seven years in the third quarter. At the same time, companies' labor costs actually declined--a recipe for keeping inflation at bay.

The report, issued yesterday by the government, was good news for investors wary of signs of inflation that could trigger another interest-rate increase from the Federal Reserve.

"It is hard to see where inflation is supposed to come from," said Gerald Cohen, an economist with Merrill Lynch & Co. in New York.

On Wall Street, the Dow Jones industrial average rose initially but soon declined and closed down 118.36 points at 11,106.65. Analysts attributed the drop to investor jitters about the outlook for some big companies, such as Coca-Cola.

"To get the strong productivity growth at this point in an expansion is really an extraordinary achievement," said Martin Baily, chairman of President Clinton's Council of Economic Advisers. The economy's continuing upswing is at a peacetime record of eight years and counting.

Productivity, defined as the amount of output for each hour of work, rose at a 4.9 percent annual rate from July through September, the Labor Department said.

At the same time, unit labor costs, considered a good measure of inflation pressures, fell at a 0.2 percent annual rate--the biggest drop since spring 1997.

Federal Reserve Chairman Alan Greenspan and other economists have linked the recent years' upturn in productivity to massive investments that businesses have made in computers and other technology.

As long as workers are increasingly productive, employers can afford to pay them more because of increased output without needing to raise prices.

If productivity falters, however, pressures for higher wages can result in price increases. The Fed already has raised interest rates three times this year, trying to prevent inflation, and Greenspan has said the nation's central bankers are staying alert for any slowdown in productivity.

The Fed policymakers' next meeting is Dec. 21. Few analysts now expect them to raise interest rates again this year.

In a separate report yesterday, the Fed said Americans' borrowing has slowed this fall compared with heavy summertime loans and credit-card use. Revolving credit, primarily credit cards, fell at a 0.6 percent annual rate in October--the first decline in a year. Total consumer credit, excluding mortgage debt, rose by 3.7 percent.

In yet another report, the Mortgage Bankers Association said the percentage of homeowners behind on mortgage payments fell to 4.1 percent from July through September, the lowest delinquency rate in almost four years.

The 4.9 percent third-quarter gain in productivity was revised upward from a previous estimate of 4.2 percent, making it the fastest growth since the last three months of 1992, when productivity rose at a 7.4 percent annual rate.

The slight drop in unit labor costs from July through September of this year came after a 4.2 percent rise in the second quarter and a 1.4 percent increase in the first. A prior report had third-quarter labor costs rising slightly, by 0.6 percent.