The Labor Department said the increase in productivity was slightly lower than an original estimate a month that productivity was rising at an annual rate of 3.8 percent. Tuesday's rally came after Federal Reserve Chairman Alan Greenspan indicated the central bank was rethinking its interest-rate policy and as the presidential election neared an apparent end after two major court decisions Monday. Greenspan's remarks were the firmest signal yet that the central bank is switching its chief concern from fighting inflation by raising interest rates to worrying that its credit tightening has gone too far and could prompt an outright recession. In a hot economy, demand for goods and workers pushes prices and wages up, causing inflation, a general rise in the price level. Because inflation can complicate business decisions and hurt people on fixed incomes, the Fed works to keep the economy from overheating by raising interest rates.
Higher rates make it harder to borrow money to buy things or invest, and slow the economy down.
One of the primary reasons the Fed has given for its recent rate increases was concern that the demand for workers was outstripping the supply because of an unemployment rate that has fallen to a three-decade low of 3.9 percent. The Fed has raised interest rates six times, beginning in June 1999, in an effort to slow the booming economy to a more sustainable pace in order to keep inflation in check. Responding to those rate increases, economic growth slowed abruptly to an annual rate of just 2.4 percent in the summer, less than half the sizzling 5.6 percent pace of the spring. But in the Labor Department's Wednesday report, it said unit labor costs, a key measure of wage pressures, rose at a 2.9 percent annual rate in the third quarter, the fastest pace since a 4.3 percent jump in the April-June quarter of 1999. Worker productivity, measured by the amount of output per hour of work, is the key to improvements in the standard of living.