By Timothy R. Homan Dec. 3 (Bloomberg) -- U.S. worker efficiency rose more than forecast in the third quarter and labor costs increased less than anticipated, signaling company efforts to rebuild profits are paying off. Productivity, a measure of employee output per hour, rose at a 1.3 percent annual rate, compared with a 1.1 percent gain estimated last month, revised figures from the Labor Department today in Washington showed. Labor costs climbed at a 2.8 percent rate, less than the 3.6 percent pace forecast. Companies reduced expenses as the economy contracted by reducing employee hours at the fastest pace in six years. The drop in raw-material prices combined with the smaller-than-expected increase in labor costs indicates companies are moving to shore up profits as the economy heads for what may be the longest recession in seven decades. ``Businesses have been more proactive in their response to weakening growth, cutting labor quickly in response to weaker demand, as they attempt to preserve profitability,'' Aaron Smith, a senior economist at Moody's Economy.com in West Chester, Pennsylvania, said before the report. Economists had forecast productivity would rise at a 0.9 percent annual pace, according to the median of 57 forecasts in a Bloomberg News survey. Estimates ranged from gains of 0.6 percent to 1.5 percent. The gain in unit labor costs, which are adjusted for efficiency gains, followed a 2.6 percent drop from April through June that was larger than previously estimated. Hours Worked Hours worked fell at a 3.1 percent pace, the biggest drop since the first three months of 2002. Non-farm output fell at a 1.9 percent rate, the most since the last recession. Compared with the third quarter of 2007, productivity rose 2.1 percent, close to the 2.5 percent annual average since 1995. Labor costs were up 1.4 percent year-over-year. The drop in commodity costs is another saving grace for companies dealing with a slowdown in demand, and may allow them to retain some of the staff they would otherwise have cut in incoming months, Brian Bethune, an economist at IHS Global Insight in Lexington, Massachusetts, said before the report. ``We are moving into the point where companies reduced hours as much as they can,'' Bethune said. ``Cost management is still a major challenge, but there is still some scope to do more on the material-cost and supplier-costs side,'' Bethune said. A Labor Department report Dec. 5 is projected to show the economy lost 325,000 jobs in November, the most since October 2001, according to the survey median. The decline would bring the total drop in payrolls to 1.5 million so far this year. Economy Contracts Gross domestic product contracted at a 0.5 percent annual pace last quarter. The U.S. economy entered a recession in December 2007, according to a panel at the National Bureau of Economic Research that dates American business cycles. The last time the U.S. was in a recession was from March through November 2001. Some economists are concerned that the productivity surge that began in 1996 is waning. In the 1990s, former Fed Chairman Alan Greenspan was one of the first to recognize productivity was accelerating because of the increased use of computers and the Internet, and that the improvement would contain inflation even as the economy gained strength and unemployment stayed low. The realization allowed the Fed to keep interest rates little changed from 1996 to 1999. U.S. companies are cutting jobs to improve productivity and to counter a global slowdown in demand. Xerox Corp., the world's largest maker of high-speed color printers, is eliminating 3,000 jobs and reducing manufacturing costs to save money next year. ``We're managing our operations with a close eye on the bottom line,'' Chief Executive Officer Anne Mulcahy said in a Nov. 24 statement. ``The restructuring actions we're taking this quarter are expected to deliver $200 million in savings next year, giving us greater flexibility to operate even more efficiently and effectively in an uncertain economic environment.'' To contact the reporter on this story: Timothy R. Homan in Washington at thoman1@bloomberg.net

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