Productivity Up 2.6% in Fourth Quarter

U.S. nonfarm productivity grew faster than expected in the fourth quarter as employers extracted more output from workers and unit labor costs fell, a government report showed on Thursday.

Productivity increased at an annual rate of 2.6%, the Labor Department said, after rising at an upwardly revised 2.4% growth pace.

Analysts surveyed by Reuters had forecast productivity, a measure of hourly output per worker that is viewed as an indicator of the economy's vitality or lack of it, rising at a 2 percent rate in the fourth quarter from a previously reported 2.3% pace.

For the whole of 2010, productivity grew 3.6% - the fastest pace since 2002 -- after expanding 3.5% in 2009.

Productivity grew rapidly as the economy emerged from the worst recession since the Great Depression of the 1930s, but the pace is slowing, implying that companies may no longer be able to wring more output from their current pool of workers.

While the recovery is strengthening and broadening out, labor market healing has been unusually slow.

The economy grew at a 3.2% annual rate in the fourth quarter, accelerating from a 2.6% pace in the prior period and economists believe strengthening domestic demand will translate into increased hiring of new workers and the lengthening of hours for existing employees.

The productivity report showed hours worked in the fourth quarter increased at a 1.8% rate after a 1.4 percent increase in the July-September quarter.

Unit labor costs, a gauge of potential inflation pressures closely watched by the Federal Reserve, fell at a 0.6 percent rate after dipping at a 0.1% pace in the third quarter.

Economists had expected unit labor costs to rise at a 0.3% rate in the fourth quarter. For the whole of 2010, unit labor costs dropped 1.5% after declining 1.6% in 2009.

Total nonfarm output grew at a 4.5% rate in the last three months of 2010, the Labor Department said, after rising at a revised 3.8% rate in the third quarter.