By Shobhana Chandra Nov. 5 (Bloomberg) -- The productivity of U.S. workers surged in the third quarter at the fastest pace in six years as companies squeezed more from remaining staff to boost profits. The measure of employee output per hour jumped at a 9.5 percent annual rate, topping the highest estimate of economists surveyed by Bloomberg News, Labor Department figures showed today in Washington. Labor costs fell at a 5.2 percent rate, capping the biggest 12-month drop since records began in 1948. Companies such as Johnson & Johnson are slashing payrolls to curb expenses until sales show sustained gains following the worst recession since the 1930s. Rising efficiency helps limit inflation, one reason Federal Reserve policymakers yesterday reiterated a pledge to keep interest rates “exceptionally low” in coming months. “Cost-cutting is the story here,” Michael Englund, chief economist at Action Economics LLC in Boulder, Colorado, said before the report. “Employment has simply contracted very fast and that’s behind the productivity gains. Clearly the Fed faces no near-term threat from inflation.” Economists had projected productivity would rise at a 6.5 percent annual pace, according to the median of 70 forecasts in a Bloomberg News survey. Estimates ranged from gains of 3.8 percent to 8.5 percent. Efficiency in the second quarter was revised up to 6.9 percent from 6.6 percent. Bigger Drop Unit labor costs, which are adjusted for efficiency gains, were projected to fall 4.2 percent and followed a 6.1 percent drop in the prior quarter that was larger than previously estimated, according to the survey median. Separately, Labor Department figures showed fewer Americans than forecast filed claims for unemployment benefits last week, a sign job losses are slowing as the economy begins to recover. Initial jobless claims dropped by 20,000 to 512,000 in the week ended Oct. 31, the fewest since January, from 532,000 the prior week. The number of people receiving jobless benefits fell to the lowest level since March, while those who had exhausted their allotment and were receiving extended payments climbed. The productivity report also showed hours worked declined at a 5 percent pace, while output climbed at a 4 percent rate. Compensation for each hour worked climbed at 3.8 percent annual pace, up from a 0.3 percent rate the prior quarter. Among manufacturers, productivity soared at a 13.6 percent pace, the biggest gain since records began in 1987. Record Drop Compared with the third quarter of 2008, productivity rose 4.3 percent, and labor expenses decreased 3.6 percent. The year-over-year measure of hours worked dropped at the fastest pace since data began six decades, while the 12-month increase in hourly compensation at 0.5 percent was also the smallest on record. The economy grew last quarter for the first time in more than a year, even as employers cut 768,000 workers from payrolls, indicating those Americans that still had jobs were more efficient. The third quarter’s 3.5 percent rate of expansion was the strongest in two years. Stephen Stanley is among economists projecting companies will soon need to hire more workers in order to keep the recovery going. “Having cut payrolls to the bone during the last downturn, firms will not in our view be able to rely solely on productivity increases for long,” Stanley, chief economist at RBS Securities Inc. in Stamford, Connecticut, said in a note to clients. “Thus, we look for companies to begin expanding payrolls in early 2010, which is sooner than many market participants expect.” Job Losses The economy has lost 7.2 million jobs since the recession began in December 2007, and unemployment reached a 26-year high of 9.8 percent in September. In addition to signaling that interest rates will stay near zero, the Fed yesterday reiterated that growth will probably “remain weak for a time.” Policy makers also acknowledged the economy had picked up as housing rebounded and consumer spending grew. For the July to September quarter, profits exceeded the consensus estimate of analysts for 81 percent of S&P 500 companies that have reported so far, data compiled by Bloomberg show. Much of the improvement in earnings has come from reducing costs. Johnson & Johnson, the world’s largest health-products company, said this week it plans to fire more than 7,000 workers as consumers reduce spending on items ranging from drugs to skin care. While the majority of cuts will occur outside the U.S., the New Brunswick, New Jersey-based company said within the country they’ll be across all businesses. Cutting Costs “People just aren’t spending as much as they used to,” Chief Executive Officer Bill Weldon said in a telephone interview on Nov. 3. In the 1990s, former Fed Chairman Alan Greenspan was one of the first to recognize productivity was accelerating because of the increased use of computers and the Internet, and that the improvement would contain inflation even as the economy gained strength and unemployment stayed low. The realization allowed the Fed to keep interest rates little changed from 1996 to 1999.

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