Nov. 7 (Bloomberg) -- Worker productivity in the U.S. accelerated more than forecast in the third quarter, leading to a decline in labor costs.

Productivity, a measure of employee efficiency, rose at an annual rate of 4.9 percent, the most in four years and up from a revised 2.2 percent in the second quarter, the Labor Department said today in Washington. Labor expenses dropped at a 0.2 percent pace, the first decrease in more than a year.

Greater efficiency helps ease concern companies will raise prices to make up for cost increases, further diminishing the threat of inflation. Slower economic growth in the last three months of the year will push up the jobless rate, which will continue to limit pay gains.

``This is short-term good news for the Federal Reserve and should help alleviate some of their near-term concerns regarding inflation,'' said Drew Matus, senior economist at Lehman Brothers Holdings Inc. in New York. Still, ``we think it could prove short-lived given expectations for growth and employment in the fourth quarter.''

Over the past 12 months, productivity increased 2.4 percent, the most since the first three months of 2005.

The report may ease concern that the productivity surge that began in 1996 was waning. Efficiency gains have slowed every year since reaching a peak of 4.1 percent in 2002. Last year, productivity rose just 1 percent, the smallest increase since 1995.

Exceeding Estimates

Economists forecast productivity would accelerate to a 3.2 percent pace, according to the median of 74 projections in a Bloomberg News survey. Unit labor costs were expected to slow to a 1 percent pace, according to the Bloomberg News survey.

Investors showed little reaction to the figures. Bonds remained higher on concern about mortgage-related losses at banks, while the dollar fell after Chinese officials signaled plans to diversify the nation's $1.43 trillion of currency reserves.

Compensation for each hour worked increased at an annual rate of 4.7 percent in the third quarter, compared with a 4.4 percent rate in the prior three months.

Productivity at non-financial corporations, a measure watched by former Fed Chairman Alan Greenspan, climbed at a 3.8 percent rate in the second quarter, compared with 0.7 percent the previous three months. These figures are released with a one-quarter lag.

Manufacturing

Among manufacturers, productivity increased at a 4.6 percent pace last quarter, compared with a gain of 2.4 percent.

The third-quarter increase in productivity reflected the pickup in economic growth. The economy expanded at a 3.9 percent rate last quarter, the fastest in more than a year, according to the Commerce Department's advance estimate released Oct. 31.

The economy may have picked up even more last quarter than initially estimated. Inventories at U.S. wholesalers jumped a greater-than-forecast 0.8 percent in September, the most in almost a year, a report from the Commerce Department showed. The government also revised up its estimate for the August increase in stockpiles, suggesting gains in inventory contributed more to growth last quarter than projected last week.

Further acceleration in growth is unlikely in coming quarters as the deepening housing recession spreads and limits consumer spending, economists forecast.

Slowdown Looms

``You look at what happened in the third quarter and you had very strong growth in output,'' James O'Sullivan, senior economist at UBS Securities LLC in Stamford, Connecticut, said before the report. ``We would certainly expect the output numbers to slow.''

The Fed last week cut its benchmark interest rate for a second time in as many months and said that while economic growth was ``solid'' in the third quarter, the pace ``will likely slow in the near term, partly reflecting the intensification of the housing correction.''

Policy makers also said the rate reductions evened the risks between a pickup in inflation and a slowdown in growth.

The report may ease concern that the productivity surge that began in 1996 was waning. Efficiency gains have slowed every year since reaching a peak of 4.1 percent in 2002. Last year, productivity rose just 1 percent, the smallest increase since 1995.

The increase in labor costs over the last year remained high by historical standards, concerning some economists. Expenses rose 4.3 percent compared with the third quarter of last year, after a 5.1 percent year-over-year gain in the previous quarter that was the biggest in 17 years.

Late 1990's Surge

In the late 1990s, Greenspan was credited as being one of the first to recognize that 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.

AirTran Holdings Inc., the Orlando, Florida-based low-fare airline is among companies investing in new equipment to lower costs and prevent productivity from flagging.

The cost to fly each seat a mile, a measure of efficiency, fell 4 percent in the third quarter as AirTran continued to add Boeing Co. 737-700s to its fleet.

``The strategic deployment of our new 737s continues to drive down costs throughout the network,'' Chief Financial Officer Stan Gadek said in a statement last week. ``We believe there are additional opportunities to further reduce costs and raise productivity.''

To contact the reporter on this story: Courtney Schlisserman in Washington at cschlisserma@bloomberg.net.

Last Updated: November 7, 2007 11:01 EST