Productivity, a crucial ingredient in the economy's long-term vitality, chugged ahead in the third quarter as profit-starved businesses squeezed more out of their workforce instead of taking on new hires, a government report Thursday showed.

But while the strong productivity is seen as key for a potent recovery, separate data showed that the labor picture is not likely to improve anytime soon, even with the added stimulus of the Federal Reserve's interest rate cut on Wednesday.

The Labor Department said nonfarm productivity, or output per worker hour, grew at a 4.0 percent annual rate over last summer, after advancing by a weaker 1.7 percent in the second quarter. It was the fastest pace since the beginning of the year when the economy boomed out of recession.

"I think the good news is that productivity is very healthy and is supporting economic growth. The downside is that this is the reason employment is going basically nowhere," said Sung Won Sohn, chief economist at Wells Fargo in Minneapolis.

However, according to the Labor Department, the number of workers signing up for unemployment benefits fell last week. On the other hand the department's more reliable average of these volatile data inched up, staying for the 10th straight week above the 400,000 level economists peg as a weak labor market.

"I think we definitely have a jobless recovery. Businesses are shell-shocked by all the blows received over the past year and a half. They are relying primarily on overtime, technology and by not spending money on people, capital goods or inventories," said Sohn.

Still, with shaky business confidence that has cut off hiring, consumers appeared to be holding up their part of the load for the economy, according to the latest retailing data.

U.S. retailers reported mostly higher October sales at stores open at least a year, somewhat alleviating fears of a disastrous holiday season and prompting some major apparel chains and department stores to raise their profit targets.

"Despite what the consumer may say about being worried about the economy, they're still spending," said Bank One chief economist Diane Swonk. "Those who think the consumer is going to fall will be mistaken."

"This to me demonstrates that consumers are going to keep the economic ship afloat," said Wells Fargo's Sohn.

STOCKS DOWN, LONG-TERM TREASURIES UP

Stocks sank on Thursday, as a poor sales outlook from technology heavyweight Cisco Systems Inc. weighed on investor confidence in U.S. stock markets.

The Dow Jones Industrial average in late morning trading session was down more than 160 points, or nearly 2 percent. The technology-laced Nasdaq composite index was off 37 points, or nearly 3 percent.

Long-term Treasury bonds surged as investors doubted the Fed's half-point cut would revive the economy any time soon or dispel deflationary pressures.

Still, while third-quarter productivity growth was a bit slower than the 4.3 percent gain forecast by analysts in a Reuters poll, economists were still heartened by the report.

"The continuing robust productivity gains should lead to rapidly improving earnings once demand picks up," said Joel Naroff of Naroff Economic Advisors in Holland, Pa.

Unit labor costs, a closely watched measure of wage pressures, advanced at a 0.8 percent rate during the quarter, after a 2.2 percent rise in the second quarter. Economists were expecting costs to drop at a 0.6 percent rate in the quarter.

But compensation per hour advanced by 4.8 percent, the biggest quarterly gain since the third quarter of 2000.

The strong productivity growth during last quarter is likely to put the Fed at ease over its decision on Wednesday to cut interest rates to keep the recovery going.

Compared to the same quarter last year, non-farm productivity advanced by 5.3 percent, the biggest increase since a matching gain in the third quarter of 1983.

The Federal Reserve, after opting to cut a key interest rate by half a percentage point on Wednesday, noted in a statement at the time that strong productivity growth was a positive force in its decision.

It was the first interest rate reduction this year and it was bigger than many Wall Street firms had expected. Last year, the central bank cut interest rates 11 times to help bring the economy out of recession, but a string of data pointing to a near-stalled recovery and a battered stock market has driven calls from Wall Street for another cut.