U.S. companies, struggling to contain escalating losses in the deepening recession, squeezed more output from their remaining workers last quarter. Productivity, a measure of employee output per hour, rose at a 3.2 percent annual rate in the fourth quarter, more than twice as much as forecast, the Labor Department today in Washington showed. Labor costs climbed at a 1.8 percent rate, less than anticipated. Efficiency rose even as the economy shrank at the fastest pace in 26 years as companies slashed millions of workers from payrolls and cut hours for those still on staff by the most since 1975. The job market is likely to keep deteriorating as the slump in consumer spending forces companies such as Macy's Inc. and Pier 1 Imports Inc. to trim costs further. ``There are more employment adjustments to come unfortunately,'' Michael Gregory, a senior economist at BMO Capital Markets in Toronto, said before the report. ``It's not really a positive story.'' Economists had forecast productivity would rise at a 1.5 percent annual pace, according to the median of 60 forecasts in a Bloomberg News survey. Estimates ranged from a decline of 1 percent to a 4 percent gain. Productivity climbed at a 1.5 percent pace in the third quarter, revised up from a prior estimate of 1.3 percent. The number of Americans filing first-time claims for jobless benefits unexpectedly jumped last week to a 26-year high of 626,000, Labor also reported today. The total number of people collecting benefits jumped to a record 4.788 million a week earlier, signaling the deterioration in labor-market conditions is deepening. Payroll Forecast Tomorrow's payroll report is projected to show the economy lost an additional 540,000 jobs in January as the unemployment rate jumped to a 16-year high of 7.5 percent, according to the median forecast. The U.S. lost almost 2.6 million jobs in 2008, the most since 1945. The gain in unit labor costs, which are adjusted for efficiency gains, followed a 2.6 percent increase from July through September that was smaller than previously estimated. Hours worked plunged at a 8.4 percent pace following a 3.4 percent third-quarter decrease. Non-farm output fell at a 5.5 percent rate, the most since 1982. Hourly pay adjusted for inflation surged at a 15.6 percent annual pace last quarter, the biggest gain since records began in 1947. Compared with the fourth quarter of 2007, productivity rose 2.7 percent, close to the 2.5 percent annual average since 1995. Labor costs were up 0.7 percent year-over-year. Most Since 2004 For all of 2008, efficiency climbed 2.8 percent, the biggest gain since 2004. Manufacturers didn't fare as well as other parts of the economy. The productivity of factory workers dropped at a 3 percent pace in the fourth quarter, sending labor costs up at a 13.3 percent rate. Gross domestic product contracted at a 3.8 percent annual pace last quarter, the most since 1982, after shrinking at a 0.5 percent pace in the previous three months. The U.S. economy entered a recession in December 2007. Pier 1, the biggest U.S. retailer of imported furniture, said yesterday it plans to shutter a distribution center in St. Charles, Illinois, and cut the equivalent of about 10 percent of its full-time staff. Home-goods retailers have been especially hard-hit during the consumer spending slowdown as sinking home values have discouraged shoppers from decorating their houses. Job Cuts Macy's, the second-largest U.S. department-store company, said this week it is cutting 7,000 jobs, or 3.9 percent of its workforce, after slashing prices to lure shoppers during the worst holiday season in 40 years. Comparable-store sales have dropped in 10 of the past 11 months. Manufacturing is also in decline as a result of the slump in spending. Cummins Inc., the maker of more than a third of North America's heavy-duty truck engines, is offering voluntary retirement packages to as many as 350 hourly employees in southern Indiana. ``The demand for our engines and related products continues to fall, and despite the significant steps already taken to align our costs with that demand, permanent job reductions have become necessary,'' Jim Kelly, president of the engine unit, said in a Feb. 2 statement. The rebound in productivity last year may ease concern among some economists that the efficiency surge that began in 1996 was 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.

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