Nearly everyone agrees that better productivity is the biggest reason the nation's economy has been able to prosper for so long with low inflation and strong corporate profits.

For banks, times could hardly be better. During much of the decade, loan problems have been miniscule as business customers have prospered. Low credit costs have helped provide strong bank revenues, while interest rates have mostly remained a nonfactor.

But the verdict on productivity is not unanimous. At least one economist, Ian Morris of HSBC Securities in New York, said he worries that productivity improvements are not broadly based and may have peaked in some areas. This implies that labor costs may be ready to rise, producing inflation and higher interest rates.

"The true and only star performer" in measurable growth of productivity is the computer industry, he said, which has grown an amazing 40% to 60% annually in recent years. But in 1998 computers "accounted for only 2.2% of industrial production or 1% of gross domestic product."

By contrast, auto industry productivity growth "is now below its long-run trend rate." he said, pointing out that the industry endured negative growth of 2% through the first three quarters of the year. Similarly, construction industry productivity growth has lagged. It fell 1.7% in the same period.

In the huge and growing service sector of the economy, gauging productivity has long been difficult. But Mr. Morris said the recent performance "appears to be poor relative to even its own history." Through the third quarter it was up a lackluster 0.5%.

Of course, even if productivity growth is less than it seems, inflation will not break out if wages remain under control. The link between productivity and wages determines unit labor costs. Labor costs are the biggest expense for most businesses and are watched carefully by Federal Reserve monetary policymakers for signs of inflation.

The Fed has raised rates three times this year and has warned that it is concerned about a tight labor market and rising labor costs. Its Open Market Committee next meets on Dec. 21.

One reason government figures don't show a bigger rise in worker pay is that more compensation has been in the form of bonuses and stock options, which are not part of the Labor Department's wage data, said Wells Fargo & Co. economist Sung Won Sohn, who pointed out that other factors may also reignite inflation.

"Those workers who are willing to jump ship to another job are getting huge pay hikes and the quit rate in the labor market has jumped to 14.6% in November from 13.4% in October," he said. "The quit rate is likely to rise and average labor costs, including variable compensation, should rise at a faster rate, contributing to higher inflation."

A threat of wage-based inflation would surely prompt further rate hikes from the Fed. Indeed, he said he thinks it is possible that the central bank will raise rates more aggressively next year, which would slow the economy.

A slowdown, naturally, carries its own risks. Mr. Morris said he thinks a significant slowdown would leave the economy susceptible to "an unexpected productivity downswing." That in turn would force businesses to cope with rising unit labor costs by raising prices, which in turn could prompt further action from the Fed.

That is not Mr. Morris' forecast, but he noted that among nonfinancial companies "profit per unit of output has already been falling seven consecutive quarters in year-over-year terms." Profits themselves have held up because of the strong economy.

"This suggests," he said, "that were a genuine economic slowdown to take shape, economy-wide profits could be unusually vulnerable as decelerating sales volume growth will be unable to disguise the economy-wide margin erosion that has already been going on for some time."

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