March 5 (Bloomberg) -- Productivity in the U.S. grew faster than the economy in the fourth quarter as businesses reduced employees' hours to rein in costs.

Productivity, a measure of efficiency, rose at a revised annual rate of 1.9 percent after a 6.3 percent gain in the third quarter, the Labor Department said today in Washington. A gauge of staff expenses increased more than forecast while prior quarters were revised down.

Slowing sales and rising fuel costs have forced companies to wring out efficiency gains to protect profits rather than rely on increasing prices. Federal Reserve policy makers are forecast to lower interest rates again this month to stave off a recession as risks to growth outweigh concerns about inflation.

``Productivity growth is still OK,'' said Nigel Gault, chief U.S. economist at Global Insight Inc. in Lexington, Massachusetts, who accurately forecast the gain. ``Companies are facing all sorts of problems with commodity costs, but they seem to be doing pretty well in holding down labor costs.''

Productivity, or how much an employee produces for each hour of work, was forecast to match the government's preliminary estimate of a 1.8 percent gain, according to the median of 65 economists surveyed by Bloomberg News. Projections ranged from 1.2 percent to 2 percent.

Hours worked fell at a 1.6 percent pace, the biggest decline since the first three months of 2003 and the second consecutive drop. The decrease was led by a fall in self- employment.

Job Losses

A private report earlier showed companies in the U.S. unexpectedly cut workers in February, the first decline in almost five years. The decrease of 23,000 jobs followed a revised gain of 119,000 the prior month that was less than previously estimated, according to the report from ADP Employer Services.

Unit labor costs, which are adjusted for efficiency gains, rose at a 2.6 percent rate, compared with the Bloomberg survey median forecast of 2.1 percent. Estimates for the prior six months were revised down, pushing the increase in the 12 months ended in December down to 0.9 percent, less then previously estimated.

Compensation for each hour worked increased at an annual rate of 4.6 percent, from a 3.4 percent rate the prior quarter.

For all of 2007, productivity rose 1.8 percent after a 1 percent increase the previous year. Labor costs rose 3.1 percent. Labor expenses account for two-thirds of the cost of producing a good or service.

Factory Efficiency

Productivity at non-financial corporations, a measure watched by former Fed Chairman Alan Greenspan, increased at a 2.9 percent rate in the third quarter. The figures are released with a one-quarter lag.

Among manufacturers, productivity rose at a 2.3 percent pace last quarter, slower than the prior quarter.

The economy grew at an annual rate of 0.6 percent in the fourth quarter, down from a 4.9 percent pace from July to September, according to government figures released last month.

A deepening housing slump and slower consumer spending signal the economy will continue to slow, prompting more firms to try to cut labor costs and indicating employment will weaken further.

A report later today is forecast to show that service industries, which reflect almost 90 percent of the economy, contracted in February for a second month.

``There's no question 2008 will be a very tough year to preserve productivity as growth slows,'' Brian Bethune, an economist at Global Insight Inc. in Lexington, Massachusetts, said before the report. ``Companies are increasing productivity basically by throttling back on hours worked. We'll see a much weaker labor market.''

Commodity Costs

General Mills Inc., the second-largest U.S. cereal maker, and ConAgra Foods Inc., which makes Chef Boyardee pasta dishes and Slim Jim meat snacks, raised profit forecasts last month and said they may be able to pass along higher commodity costs to customers while also improving efficiency and reducing expenses.

The two foodmakers said they're delivering goods to customers such as Wal-Mart Stores Inc. more efficiently by reducing the number of shipments.

The step is cutting diesel-fuel costs by ``millions of dollars,'' General Mills Chief Executive Officer Ken Powell said at a Feb. 19 conference in Florida.

Interest Rates

Traders are betting the Fed will lower the benchmark rate by 0.75 percentage point at or before the March 18 meeting, bringing it to 2.25 percent, according to futures trading.

Some economists remain concerned the productivity surge that began in 1996 is waning. Efficiency increases have slowed every year from 2002 to 2006. Last year's gain compared with an average increase of 2.5 percent since 1995.

In the late 1990s, Greenspan was one of the first to recognize productivity was accelerating, and that the improvement could help contain inflation even as the economy strengthened and unemployment stayed low. The realization allowed the Fed to keep interest rates little changed from 1996 to 1999.

To contact the reporter on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net.

Last Updated: March 5, 2008 09:04 EST