Productivity up 8.6%

The 8.6% surge in nonfarm productivity reported by the Labor Department far surpassed Wall Street's expectations. That was after a revised 5.5% productivity growth in the last three months of 2001.

But the improvement came at a price. Businesses, responding to the lingering effects of last year's recession, cut back on their payrolls. That caused the total number of hours worked to fall at a rate of 1.9%. Output, however, rose at a 6.5% rate.

Economists such as Gary Thayer of A.G. Edwards & Sons Inc. said there is little worry of inflation, giving Federal Reserve officials, scheduled to start a meeting today to set interest rates, even more leeway to hold rates steady at 40-year lows.

"This is the kind of news the Fed likes to see and means that inflation is not going to be a problem in the near term and probably allows them to keep rates low for a while," Thayer told Reuters. "It shows companies are effectively keeping costs in line as the economy recovers and will set the stage for better productivity and growth down the road."

Unit labor costs fell 5.4% during the quarter, it was the steepest decline since a 6.5% drop in the second quarter of 1983. In manufacturing, unit labor costs declined by 6.5%, the biggest falloff in more than 40 years.