Second-Quarter Productivity Rose 2.7%, Binding Inflation

WASHINGTON -- Workers were more productive than originally thought in the second quarter, helping explain why the economy grew at a healthy pace without sparking inflation.

Meanwhile, the Commerce Department reported that July wholesale inventories dropped an unexpected 0.2%.

The Labor Department said productivity, or output per hour worked, shot up at a 2.7% seasonally adjusted annual rate in the second quarter. That was much faster than the initial estimate of 0.6%, thanks to a big upward revision of the second-quarter gross domestic product, and it nearly doubled the first quarter's 1.4% rate.

Productivity, a key factor behind Americans' standard of living, hasn't made such a leap since the end of 1993, and that verve was enough to ward off any immediate inflation fears. Unit labor costs -- the difference between what businesses pay their workers and the productivity gains they reap -- inched up 0.5% in the second quarter, well below the 3.1% increase in the first quarter and the tiniest rise in three years. Such costs make up roughly two-thirds of a product's costs; if they remain under control, companies don't feel pressured to raise a product's price.

But the fact that one revision completely changes the productivity picture illustrates just how volatile and misleading the report can be, economists said. It probably understates growth, in part because the government has such trouble measuring service-sector output. It's much easier to measure, say, the number of widgets made than it is to gauge output of a hotel concierge. It's also difficult to measure efficiency gains from computers, fax machines and other newer tools.

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