Worker productivity, the single biggest factor determining living standards, grew at the fastest pace in nearly six years in the spring while labor costs fell by the most in nine years, as companies slashed costs to survive the recession.
Increases in productivity can help boost living standards because companies can increase wages financed by rising output. But during the recession, companies have been using their productivity gains to bolster their bottom lines as many struggle to stay in business.
This cost-cutting helped many companies report better-than-expected second-quarter earnings despite falling sales. But economists worry that such aggressive cuts will make it harder to mount a sustainable recovery. That's because the lack of wage growth and shortage of jobs will depress household incomes and make the prospects for a sustained rebound in consumer spending less likely.
Consumer spending is critical to the recovery since it accounts for about 70 percent of total economic activity.
The Labor Department said Wednesday that productivity, the amount of output per hour of work, rose at an annual rate of 6.6 percent in the April-June quarter, the largest advance since the summer of 2003. Economists expected an increase of 6.4 percent, matching the government's initial estimate last month.
Labor costs fell at an annual rate of 5.9 percent. That's the largest drop since the second quarter of 2000, and slightly bigger than the 5.8 percent decline estimated a month ago.
The slight changes reflected that total output, as measured in productivity terms, did not drop as much as initially estimated and hourly compensation, after adjusting for inflation, did not rise as much.
On Wall Street, stocks were trading in tight range Wednesday morning. The Dow Jones industrial average dipped about 12 points and broader indices also edged down. Worries about banks and whether stocks have risen too quickly in their six-month rally caused a steep slide on Tuesday.
The 6.6 percent rate of increase in productivity in the second quarter compared with a 0.3 percent rise in the first quarter. It was the largest quarterly increase since a 9.7 percent jump in the third quarter of 2003.
The 5.9 percent drop in unit labor costs followed a 5 percent decline in the first quarter.
Businesses producing more with fewer employees means that unemployed Americans continue to face a dismal job market. The unemployment rate dipped to 9.4 percent in July, but many economists expect it returned to 9.5 percent in August. The government is scheduled to release that report Friday.
While many of the nation's big retailers have said back-to-school sales have been dismal, the government's Cash for Clunkers program did boost auto sales in August.
Ford Motor Co., Toyota Motor Corp. and Honda Motor Co. all reported increased sales in August as consumer snapped up their fuel-efficient models. But rivals Chrysler Group LLC and General Motors Co., which have just emerged from bankruptcy protection, saw their sales fall for the month.
Meanwhile, the Commerce Department said Wednesday that factory orders rose 1.3 percent in July, after the June increase was revised upward to 0.9 percent. The July bump was still below analysts' expectations of a 2.2 percent increase, according to a survey by Thomson Reuters.
Shipments of new autos grew 5.1 percent, as sales jumped due to the clunkers program. An 18.5 percent jump in transportation goods orders drove the overall increase. Orders for commercial aircraft and parts doubled after that volatile category fell 30 percent in June.
But orders for nondurable goods, such as food, petroleum products and chemicals, fell 1.9 percent, the most since December.
The report followed a positive reading about manufacturing activity Tuesday. The sector grew in August for the first time in 19 months, according to a private survey of purchasing managers.
The Institute for Supply Management said its manufacturing index rose to 52.9 in August, up from 48.9 the previous month. That was its first reading above 50, which indicates expansion, since January 2008.
------AP Economics Writer Christopher S. Rugaber contributed to this report.