The productivity of America's workers slowed in the final three months of 2003, advancing at a 2.7 percent annual rate.

The slowdown came after productivity — the amount an employee produces per hour of work — rocketed at a 9.5 percent rate in the third quarter, the Labor Department (search) reported Thursday.

Although the fourth-quarter's productivity performance was weaker than the 3.4 percent growth rate that economists were forecasting, it still marked a decent pace.

Analysts were predicting productivity to slow in the fourth quarter as economic growth moderated. The economy grew at a healthy 4 percent annual rate in the final quarter of 2003, down from a blistering 8.2 percent pace in the prior quarter. That marked the best performance in nearly two decades.

For all of 2003, productivity grew by a solid 4.2 percent, following an even stronger 4.9 percent increase in 2002.

In other economic news, new claims for unemployment benefits (search) rose last week by a seasonally adjusted 17,000 to 356,000, the department said. Some of the increase was related to bad weather in some states, which caused weather-sensitive companies to lay off workers, a government analyst said.

Economists were expecting claims to hold steady.

Even with the rise, claims have been below 400,000 for 18 straight weeks, a sign the pace of layoffs is stabilizing, analysts say.

On the productivity front, efficiency gains are important to the economy's long-term vitality. They allow the economy to grow faster without igniting inflation. Companies can pay workers more without raising prices, which would eat up those wage gains. And productivity can bolster a company's profitability.

As profits improve, companies may be more willing to boost capital investment and hiring, which are critical factors in the recovery's durability.

Companies' output in the fourth quarter increased at a solid 4.2 percent annual rate, after surging at a 10.4 percent rate in the third quarter.

Workers' hours in the fourth quarter rose at a rate of 1.5 percent , up from a 0.8 percent growth rate in the prior quarter.

During the economic slump, gains in productivity came at the expense of workers: Companies produced more with fewer employees. Although companies are still keeping their work forces relatively lean, they did produce more with small increases in workers in the last two quarters.

Companies' unit labor costs fell at a rate of 1.3 percent in the final quarter of 2003, after a 5.6 percent rate of decline in the prior quarter. Falling labor costs bode well for companies' profit margins.

Workers' hourly compensation — including wages and benefits — grew at a 1.3 percent rate in the fourth quarter, on top of a 3.4 percent growth rate in the third quarter.

The Federal Reserve (search), in holding short-term interest rates steady at a 45-year low of 1 percent last week, said such super-low rates along with productivity gains are providing important ongoing support to economic activity.