updated 12/7/2004 8:46:20 AM ET 2004-12-07T13:46:20

The productivity of America’s workers grew at a 1.8 percent annual rate in the third quarter, the slowest pace in nearly two years, the government reported Tuesday.

Major Market Indices

The deceleration in this vital economic indicator, however, raised some hope that employers who have squeezed so much efficiencies out of their existing work forces may seek to boost hiring as a way to meet customer demand.

The Labor Department’s latest snapshot of productivity — the amount an employee produces for every hour of work — showed that efficiency gains were slightly weaker than the 1.9 percent growth rate first estimated for the July-to-September quarter.

The new figure — based on more complete data — marked a slowing from the 3.9 percent productivity pace logged in the second quarter.

Analysts were expecting productivity to rise slightly to a 2 percent growth rate for the third quarter. Still, the long-term productivity trend remains healthy, economists say.

For the year ending in September, productivity increased by a solid 3.1 percent.

Efficiency gains are important to the economy’s long-term vitality. They allow the economy to grow faster without propelling 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.

But in the third quarter, output rose at a solid 4.2 percent rate and the hours of all workers increased at a 2.4 percent pace, the biggest advance since the third quarter of 1999. The economy added 402,000 jobs during that quarter.

With productivity slowing, though, unit labor costs rose at a 1.8 percent rate in the third quarter. 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.

With signs that inflation is creeping higher, the Federal Reserve is expected to boost short-term interest rates for a fifth time this year when it meets next on Dec. 14.

President Bush, meanwhile, is preparing his second-term economic agenda, which includes overhauling Social Security and simplifying the nation’s tax code. Democrats disagree with many of the president’s economic choices, especially his massive tax cuts, which they contend have mainly benefited the wealthy and pushed the government’s balance sheets deeper into red ink.

The economy grew at a 3.9 percent rate in the third quarter. Even though the economy is growing solidly, the labor market is still trying to gain real traction.

The economy added 112,000 jobs in November, a deceleration from the robust 303,000 positions generated in October.

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