updated 9/6/2007 12:49:46 PM ET 2007-09-06T16:49:46

Worker productivity rebounded, growing at the fastest pace in nearly two years, while wage pressures eased sharply in the spring — developments that should reduce inflation worries.

Major Market Indices

The Labor Department reported Thursday that productivity, the amount of output per hour of work, jumped to an annual growth rate of 2.6 percent in the April-June quarter, even better than the 1.8 percent increase that was originally reported.

Wage pressures, as measured by unit labor costs, slowed to an annual growth rate of 1.4 percent, slower than the initial estimate that labor costs were rising at a 2.1 percent rate.

Rising wages are good for workers, but if those gains are not accompanied by increased productivity, they can trigger unwanted inflation. If productivity is growing, it allows businesses to pay their workers more out of the increased output rather than by raising prices.

The increase in productivity and the reduction in labor costs were better than had been expected, raising hopes that the Federal Reserve will have the leeway to cut interest rates at its next meeting on Sept. 18.

Investors are hoping for such a move to insulate the economy from the steepest housing slump in 16 years and turbulence in financial markets stemming from rising mortgage defaults.

In other economic news, the number of newly laid off workers filing claims for unemployment benefits fell last week for the first time in seven weeks. The improvement was double what had been expected.

The Labor Department reported that jobless claims dropped to 318,000, down 19,000 from the previous week. A string of increases in jobless applications had raised concerns that the severe slump in housing was beginning to take its toll on the labor market.

In another hopeful sign, the nation’s retailers reported that consumers returned to the malls in August. A late back-to-school shopping spree helped retailers rebound from lackluster sales in July. However, economists are still concerned that the weakening housing market and turbulent financial markets might hurt future sales.

Among the big chains reporting strong sales in August were Wal-Mart Stores Inc. and Target.

The government will report August jobless figures on Friday. The expectation is that the unemployment rate will hold steady at 4.6 percent with a modest 108,000 new jobs created, up slightly from the 92,000 jobs created in July.

In its latest snapshot of business conditions around the country, the Fed reported Wednesday that there were only limited reports that the turmoil in financial markets in August was having an adverse effect on business activity outside of real estate.

The revisions to productivity and labor costs had been expected given an upward revision announced last week to overall economic growth in the second quarter. The government said that the economy was growing at an annual rate of 4 percent in the April-June period, the best showing in more than a year and up from an initial estimate of 3.4 percent.

The increase in output pushed productivity higher and meant lower unit labor costs.

Copyright 2007 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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