Employers became leaner and more efficient in the third quarter. Wages, meantime, remain flat or falling. The result is that productivity — output per hour of work — jumped at the fastest pace in six years.
The good news for companies, though, may be bad news for the jobless. As long as companies can get their workers to produce more, they have little reason to hire — at least until consumer spending picks up. And the squeeze on incomes could depress consumer spending, putting the economic recovery at risk.
Still, some economists were encouraged by the productivity report. They say that eventually, employers won't be able to squeeze more from their staffs. They will then have to ramp up hiring — something that could happen next year, even though the jobless rate is expected to hit double digits.
Productivity rose at an annual rate of 9.5 percent in the July-September quarter, the Labor Department said Thursday. That was much better than the 6.4 percent gain economists had expected. Unit labor costs fell at a 5.2 percent rate.
While companies aren't doing much hiring, they're not cutting as many workers, either. The number of newly laid-off workers filing claims for unemployment benefits last week fell to the lowest level in 10 months
The 9.5 percent productivity rise followed a 6.9 percent surge in the second quarter and was the fastest since a 9.7 percent increase in the third quarter of 2003.
The gain reflected that the overall economy, as measured by the gross domestic product, grew for the first time in a year — at an annual rate of 3.5 percent. The higher output came as companies continued to lay off workers. That meant employers produced more with fewer workers.
The 5.2 percent drop in unit labor costs marked the third straight decline and was larger than the 4 percent decrease economists were expecting.
Productivity is the key ingredient to rising living standards. It lets companies pay their workers higher wages. The increases are financed by the increased output rather than higher costs for products.
But as they struggled with the recession, companies boosted output this year while continuing to lay off workers. They also kept wages down by freezing pay or imposing unpaid furloughs.
"Survival meant cutting costs as rapidly as possible and fulfilling orders with the fewest number of workers," said Joel Naroff, chief economist at Naroff Economic Advisors.
Naroff said hiring could remain sluggish for months. But other analysts are more optimistic. They were encouraged by the productivity report, noting that companies are starting to reach the limits of how much they can produce with their shrunken work forces.
"We believe businesses will have to start to increase hours worked and payrolls around the turn of the year since they cannot expect their current work force to sustain such rapid productivity growth," said Michelle Meyer, an economist at Barclays Capital.
The problem is that consumer demand could falter once the government removes the stimulus programs it has put in place, such as record-low interest rates and homebuyer tax credits. Companies could stop hiring if they think demand will slump again.
In a separate report, the Labor Department said first-time claims for jobless benefits last week fell by 20,000 to a seasonally adjusted 512,000. That's better than economists' estimates of 523,000.
Economists closely watch initial claims, which are considered a gauge of the pace of layoffs and an indication of employers' willingness to hire new workers.
On Wall Street, the better-than-expected jobless claims report and news that retailers posted their second straight month of sales gains in October buoyed investors. The Dow Jones industrial average added more than 175 points in afternoon trading, and broader indexes also gained.
The four-week average of jobless claims, which smooths fluctuations, dropped to 523,750, its ninth straight decline. That's 135,000 below the peak for the recession, reached in early April.
Despite the improvement, initial claims remain well above the roughly 400,000 that economists say will signal job creation.
Another 4.1 million people claimed extended unemployment benefits in the week ended Oct. 17, the latest data available, an increase of about 100,000 from the previous week. Congress has added 53 weeks of emergency aid on top of the 26 weeks typically provided by states.
Still, as roughly 7,000 Americans run out of extended benefits every day, the House is expected to approve legislation that would add another 14 to 20 weeks. The Senate unanimously approved a similar proposal Wednesday.
The National Employment Law Project, an advocacy group, estimates that up to 1.3 million people would exhaust their benefits without the extension.
Economists expect the nation lost a net total of 175,000 jobs last month, adding to the 7.2 million lost since the recession began in December 2007. And many expect the jobless rate could rise as high as 10.5 percent before the recovery gains enough steam to start pushing it down next summer.
Layoffs have continued this week. Microsoft Corp. said it was cutting 800 more jobs at its facilities worldwide. That comes on top of the 5,000 layoffs the software giant announced in January.
Johnson & Johnson said it could cut up to 8,300 jobs as part of a restructuring and Sprint Nextel Corp., the nation's third largest wireless provider, said it planned to trim "dozens" of jobs from its wholesale division amid a drop in customers.
Economic growth could slow early next year as various government stimulus programs wind down, analysts say. That uncertainty has made many employers reluctant to hire and households contending with more layoffs, stagnant wages and depleted savings.
But the Federal Reserve pledged Wednesday to continue to keep interest rates low for an "extended period," a commitment central bank policymakers can make because wage and general inflation pressures have vanished during the downturn.