updated 8/7/2007 5:22:33 PM ET 2007-08-07T21:22:33

The productivity of American workers rebounded in the spring while wage pressures eased, favorable economic developments that analysts worried might prove only temporary.

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The Labor Department reported Tuesday that worker efficiency rose at an annual rate of 1.8 percent in the April-June quarter, more than double the 0.7 percent pace of the first three months of the year.

Meanwhile, unit labor costs rose at a 2.1 percent rate, marking the second consecutive quarter that wage pressures have eased. While higher wages are good for workers, if wages rise too quickly they can spur unwanted inflation.

Fed policymakers, as expected, kept a key interest rate unchanged at their meeting on Tuesday but they did signal concerns about the recent market volatility, saying that “downside risks to growth have increased somewhat.”

Wall Street experienced another wild day with the Dow Jones industrial average down 90 points immediately after the Fed’s mid-afternoon announcement but then rallying to end the day up 35.52 points at 13,504.30.

The second quarter improvements in productivity and wage pressures were not viewed as large enough to convince the central bank that inflation has been contained. Analysts noted that for the 12 months ending in June, unit labor costs are up by 4.5 percent, the highest year-over-year increase in nearly seven years.

Sal Guatieri, an economist at BMO Capital Markets, said the continued wage pressures would discourage the Fed from cutting interest rates unless the turmoil in credit markets gets significantly worse. The Fed closely monitors productivity and labor costs for signals of underlying inflation pressures.

Productivity, the amount of output per hour of work, is the key ingredient for rising living standards. As long as productivity is rising at a solid rate, the increased output allows businesses to pay their workers more without having to boost the cost of their products, which increases inflation.

The 1.8 percent rise in productivity in the second quarter was slightly below the 2 percent advance that had been expected.

The productivity increase reflected the fact that overall economic output, as measured by the gross domestic product, jumped sharply in the spring to an annual rate of 3.4 percent, the fastest pace in more than a year and up sharply from an anemic 0.6 percent growth rate in the first three months of the year.

Economists believe that the continued slump in housing and the spillover problems in credit markets will depress growth for several more months. They are forecasting that overall economic growth will slow to around 2.5 percent in the second half of this year and unemployment will edge up. The jobless rate rose in July to 4.6 percent.

After slowing sharply for two decades, productivity began to rebound in the mid-1990s, thanks to increased business investments in labor-enhancing equipment such as computers.

But productivity has been slowing in recent years, leaving economists to wonder if it is just a normal occurrence as part of the business cycle or a sign that the productivity boom of the late 1990s and early part of this decade is beginning to fade.

Revised data released Tuesday showed that the slowdown in productivity growth was even more pronounced than previously believed. The government said that productivity rose by just 1 percent last year, down from a previous estimate of 1.6 percent. For 2005, the increase was 1.9 percent after a 2.7 percent rise in 2004. Previously, 2005 had been put at 2.1 percent and 2004 at 2.9 percent.

The government revised its estimates of overall economic growth for the past three years, saying GDP growth over the past three years has averaged 3.2 percent, down by 0.3 percentage point from the previous estimates.

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