US productivity figures cause optimism

A trader chews on his pen as he watches the monitors on the floor at the New York Stock Exchange shortly before the closing bell Thursday. PHOTO: AP

The US economy is primed to soar once it breaks through a cloud of Iraqi war fears and jobs gloom, experts said after productivity roared in the third quarter.

A day after the Federal Reserve axed key interest rates half a percentage point to stimulate activity, new data showed third-quarter business productivity leapt at an annual pace of 4 percent.

The surge in productivity was in line with market analysts' expectations. It followed a second-quarter advance of 1.7 percent.

When compared with the same quarter of last year, third-quarter productivity soared 5.3 percent -- the steepest gain in nearly 29 years.

Productivity, or output per hour worked, is a major factor determining the maximum speed the economy can handle.

"Productivity is the so-called silver lining in this gray employment cloud," said Sal Guatieri, Chicago-based global economist at Bank of Montreal.

"Obviously, companies are finding ways to squeeze out more efficiency gains with current workers because they are certainly not hiring too many workers.

"It is good news to the extent that it implies better profitability in the near term and eventually will allow companies to increase their capital expenditure and to rehire."

The data followed a surprisingly hefty interest-rate cut, which brought the federal funds rate target to a new 41-year low of 1.25 percent.

Wall Street ignored the productivity data. The Dow Jones industrials average of 30 top stocks tumbled 184.77 points, or 2.11 percent, to close at 8,586.24 as investors worried about profits.

President George W. Bush told a news conference the economy was recovering, but not fast enough.

"The economy has come out of a recession and is growing but I am not satisfied and I know we can do better," he said.

The fundamental economic indicators were good, he said.

"Interest rates are low so Americans can buy more homes, inflation is low so paychecks go further in buying groceries and gas, the productivity of our workers is high," he said.

Experts agreed that the economy had yet to take off, partly because consumers and businesses were being cowed by the threat of a US-led war with Iraq.

US consumer confidence plunged to a nine-year low in October, a private survey by the Conference Board showed, as people worried about Iraq and their jobs.

The US unemployment rate rose to 5.7 percent in October from 5.6 percent the month before.

As people eased up on spending, with once-bustling car showrooms beginning to empty, economic growth was widely expected to slide to less than 2.0 percent in the last quarter from 3.1 percent in the third quarter.

Major stores reported mixed sales in October. JCPenney said sales soared 13.7 percent, and The Gap posted an 11-percent advance, but Sears said its own sales fell 10 percent.

"The outlook is hinging on concerns about the Iraqi situation," said Salomon Smith Barney economist Steven Wieting.