The productivity of America's workers grew at a 1.9 percent annual rate in the third quarter, the smallest gain since late 2002, the government reported Thursday.

The increase in productivity (search) — the amount an employee produces for every hour of work — followed a brisk 3.9 percent pace registered in the second quarter, the Labor Department (search) said. The figure for the July-to-September period was better than the 1.7 percent growth rate some economists were forecasting.

Analysts have been expecting productivity growth to slow somewhat based on the hope that businesses would seek to hire workers to help meet customer demand, rather than rely largely on greater efficiencies from fewer or existing workers to do that.

With productivity slowing, unit labor costs rose at a 1.6 percent rate in the third quarter, up from a 1 percent pace in the second quarter. The third-quarter increase marked the biggest advance since the first quarter of 2003, when unit labor costs rose at a 1.6 percent pace.

Unit labor costs is a measure of how much companies pay workers for every unit of output they produce. The recent rise in these costs, should they continue, could put pressure on companies' profit margins, analysts say.

In other economic news, initial claims for unemployment benefits plunged last week by a seasonally adjusted 19,000 to 332,000, the Labor Department said in a second report. A portion of the decline reflected fewer hurricane-related claims in Florida, a department analyst said. Even so, the figures — better than economists expected — offered hope that the recovery in the labor market may be gaining traction.

The state of the economy and the job market were major sparring points between President Bush and his Democratic rival, John Kerry, during the campaign.

Now looking ahead to his second term, Bush wants to move forward on his economic agenda, including simplfying the tax code, reforming Social Security and strengthening the economy to improve job creation.

Employers have added more than a million jobs in the past year, but since Bush took office in January 2001, the economy has lost a net 821,000 jobs.

The government reports on the nation's employment climate for October on Friday. Analysts are forecasting payrolls to grow by a net 175,000 for the month, up from a lackluster 96,000 in September. The jobless rate is expected to hold steady at 5.4 percent.

The economy grew at a respectable 3.7 percent annual rate in the third quarter, up from from a 3.3 percent pace in the prior period.

With the economy back on solid ground after suffering from the 2001 recession and jolted by terrorist attacks and corporate scandals, Federal Reserve (search) policy-makers want to continue to move rates from extraordinarily low levels to more normal levels to make sure inflation doesn't become a threat to the economy down the road.

Against that backdrop, the Federal Reserve is expected to boost short-term interest rates for a fourth time this year when it meets next week. Analysts believe the Fed will push up a key rate from 1.75 percent to 2 percent.

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.

During the economic slump, however, gains in productivity came at the expense of workers. Companies produced more with fewer employees.

In the third quarter, however, output rose at a 4.1 percent rate and the hours of all workers increased at a 2.1 percent pace, the biggest advance since the third quarter of 1999.