WASHINGTON -- The productivity of American workers, the critical component for rising living standards, increased by 4.1 percent in 2004, capping a remarkable three-year period in which worker efficiency climbed at the fastest pace in a half century.
However, the Labor Department reported yesterday that productivity for the final three months of the year was up at an annual rate of just 0.8 percent, which was the slowest quarterly increase in almost three years.
The rapid gains in productivity began slowing in the July-September quarter when productivity rose by just 1.8 percent after increases of 3.7 percent in the first quarter and 3.9 percent in the second quarter last year.
On Wall Street, the Dow Jones industrial average dipped 3.69 points to close at 10,593.10 yesterday as investors worried that the sharp slowdown in productivity gains over the past six months will fuel inflation fears at the Federal Reserve, prompting policy makers to begin moving rates up faster.
There have been six quarter-point increases since June, including the latest rate increase on Wednesday.
But private analysts said productivity growth, while slowing from the supercharged rates of the past three years, should remain at healthy levels through 2005.
''We should see productivity settle in at rates just above 2 percent, which will be a solid level consistent with low inflation and low interest rates," said Mark Zandi, chief economist at Economy.com.
Productivity, the amount of output produced for each hour of work, is the key factor in raising living standards because it allows companies to pay their workers more based on their increased efficiency without having to resort to raising the price of their products, which would increase inflation.
Productivity rose by 4.4 percent in both 2003 and 2004.
The 4.3 percent average annual gain for the past three years was the strongest productivity performance in more than a half-century of record keeping.
The only three-year period that came close to that performance was a 4.2 percent average turned in from 1949 through 1951.
The downside of that increased efficiency is that companies, by getting more output from their existing work force, are able to avoid hiring new workers.