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updated 3/4/2010 11:12:34 AM ET 2010-03-04T16:12:34

Productivity in the final three months of last year surged at a faster pace than previously thought as labor costs fell more rapidly.

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The Labor Department reported Thursday that productivity jumped at an annual rate of 6.9 percent in the fourth quarter, even better than an initial estimate of a 6.2 percent growth rate. Unit labor costs fell at a rate of 5.9 percent, a bigger drop than the 4.4 percent decline initially estimated.

The combination of rising productivity and falling labor costs bolsters company profits and helps keep inflation at bay. But it also puts American households under stress, leaving them with less income to increase consumer spending, the key ingredient to economic growth.

Productivity has posted sizable increases for three straight quarters as companies squeezed more output from their reduced work forces. Companies, struggling with the deepest recession in decades, have cut 8.4 million jobs over the past two years.

Those job losses and fears of even more layoffs have kept a lid on wage increases and overall inflation. That has given the Federal Reserve the leeway to push a key interest rate to a record low and keep it there for more than a year in an effort to jump-start economic growth.

Economists believe that businesses at some point will have to start rehiring workers because they are close to exhausting the amount of growth they can achieve with their depleted work forces.

The productivity growth rate of 6.9 percent surpassed expectations for only a modest 0.1 percentage point rise from last month's initial estimate of a 6.2 percent growth rate. Productivity is the amount of output per hour of work.

Graph: Productivity

The revision reflected the fact that the government last week revised up its initial estimate for total economic output, as measured by the gross domestic product, to show a rise of 5.9 percent in the fourth quarter. That was up from an initial estimate that GDP was growing at an annual rate of 5.7 percent in the fourth quarter.

While the 5.9 percent GDP increase was the fastest growth pace in six years, two-thirds of that strength reflected a slowdown in the pace at which businesses are cutting inventories. That inventory swing is expected to be temporary.

The worry is that the economic rebound could falter in coming months if unemployment remains high and consumers don't have the income growth needed to boost spending. Consumer spending accounts for 70 percent of total economic activity.

For all of 2009, productivity among nonfarm workers rose by 3.8 percent, nearly double the 2 percent increase in 2008. It was the fastest annual increase in productivity since a 4.6 percent increase in 2002, another year when the country was struggling to emerge from a recession.

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