Productivity Soars; Jobless Claims Drop to Six-Month Low

America's business productivity soared in the second quarter of 2003 (search) and new claims for unemployment benefits dropped to a six-month low last week, a double dose of good news as the economy tries to get back to full throttle.

Productivity -- the amount that an employee produces per hour of work -- grew at an annual rate of 5.7 percent in the April to June quarter, the best showing since the third quarter of 2002, the Labor Department (search) reported Thursday. That marked an improvement from the 2.1 percent growth rate in productivity posted in the first three months of this year.

In a second report from the department, new applications for jobless benefits fell by a seasonally adjusted 3,000 to a six-month low of 390,000 for the work week ending Aug. 2. It marked the third week in a row that claims were below 400,000, a level associated with a weak job market. This suggest the pace of layoffs is stabilizing. Claims hit a high this year of 459,000 during the work week that ended April 19.

Both the productivity and jobless claims figures were better than economists were expecting. They were forecasting productivity to grow at a 4 percent pace in the second quarter and for jobless claims to rise.

For the economy's long-term health and rising living standards, solid productivity gains are crucial. They allow the economy to grow faster without triggering inflation. Companies can pay workers more without raising prices, which would eat up those wage gains. And, productivity gains also can bolster a company's profitability.

Federal Reserve Chairman Alan Greenspan (search) told Congress last month that it has been unusual for companies to achieve healthly gains in productivity when the performance of the overall economy has been so lackluster.

"To some extent, companies under pressure to cut costs in an environment of still-tepid sales growth and an uncertain economic outlook might be expected to search aggressively for ways to employ resources more efficiently," Greenspan said. "That they have succeeded, in general, over a number of quarters suggests that a prior accumulation of inefficiencies was available to be eliminated," he added.

One consequence of improving productivity, however, has been an ability of many businesses to pare existing workforces and still meet increases in demand, Greenspan said.

In the second quarter, businesses boosted output at a 3.4 percent rate, up from a 1.4 percent growth rate in the first quarter. But workers' hours were cut at a 2.2 percent rate in the second quarter, following a 0.7 percent rate of decline in the prior three months.

Improved productivity gains have contributed to a sluggish jobs market.

The nation's unemployment rate climbed to a nine-year high of 6.4 percent in June. The rate dipped to 6.2 percent in July mainly because a flood of people left the civilian labor force. Businesses cut payrolls in July for the sixth month in a row.

Even if companies slow the pace at which they lay off workers -- as evidenced by the recent drops in jobless claims -- that doesn't mean they'll be in a rush to hire, economists said. Companies are likely to remain cautious, waiting for clearer signs that the economy is on an upward growth path before they beef up their workforce, economists said.

Against that backdrop, the unemployment rate is likely to creep up in the coming months, economists said.

Still, Thursday's report showed that people who kept their jobs made gains. Workers' real hourly compensation rose at a 2.9 percent rate in the second quarter, the biggest increase since the third quarter of 2000, and up from a 0.2 percent growth rate in the first quarter.

Companies' unit labor costs, meanwhile, fell at a rate of 2.1 percent in the second quarter, boding well for profit margins. That compared with a 2 percent rate of increase in the first quarter.

With scattered signs of an economic revival, though, economists expect the Fed to hold a key short-term interest rate at a 45-year low of 1 percent at its next meeting on Aug. 12. Some economists are predicting a growth rate in the second half in the range of 3.5 percent to 4 percent or more, as near rock-bottom short-term interest rates and a fresh round of tax cuts take hold.