The surprising 4.2% advance in worker productivity during the third quarter suggests calm inflation numbers ahead and a near-term peak in interest rates that could bolster bank stocks.

Though the report released Friday by the Labor Department covers only the three months from July through September, it included the last data linked to wages and prices to be published before the Federal Reserve's monetary policymakers meet Tuesday in Washington.

Wall Street observers are split about whether the Fed will raise short-term interest rates a third time this year. Economists at Merrill Lynch & Co., for example, say they anticipate a rate hike Tuesday but none at all next year. Others say the Fed will pass this time but could still raise rates later if the economy does not slow down.

There is an informal consensus, however, that after Tuesday the central bank would not consider notching rates upward until next spring, in deference to concerns about year-2000 problems.

A flat retail sales report for October also reinforced the view that the economy is not overheating.

"My guess is that we will have a market rally either way the Fed decides to go," said Irwin Kellner, a professor of economics at Hofstra University and a veteran New York bank economist. "A rate hike would be seen as the last one of the century, and no hike will still mean further Fed moves are off the table for maybe four or five months."

Bank and financial stocks typically are the prime beneficiaries when investors sense that an interest rate increase is out of the picture.

The 4.2% third-quarter rise in productivity was well above the 3% gain predicted by most economists, even accounting for recent government statistical revisions. On the opposite side of the scales, unit labor costs rose by just 0.6%, far below the expected 1.1%.

Higher productivity effectively means workers cost employers less and, therefore, inflation is muffled.

It was "a spectacular report," said Ian Shepherdson of High Frequency Economics in Valhalla, N.Y., who said he does not expect a Fed rate hike Tuesday. He noted that productivity is up a healthy 2.9%, year over year.

Labor costs are up just 1.3% from a year earlier, and this is below the current rate of core producer price inflation. Mr. Shepherdson said this suggests "we are more likely to see lower inflation over the next few months than higher inflation."

At the same time, "when unit labor cost growth is this low, rising commodity prices pose much less risk," Mr. Shepherdson said.

Economist Don Hilber of Wells Fargo & Co. said annual growth of unit labor costs of less than 2%, with productivity simultaneously growing 2.5% to 3%, is a "pretty good combination."

The Fed may conclude that higher rates are not warranted in such a benign environment, he said, but he added that "a case can still be made either way, and the Fed is probably going to have a good debate."

In fact, productivity growth is one of the most debated issues among economists these days.

Mr. Kellner, for instance, says the recent good productivity numbers should not be seen as having reversed the long-term trend to lower productivity that began in the 1970s.

"I would question the general trend of productivity and ask whether we are really as productive as these numbers suggest," he said. "We have pagers and cell phones that make us available for work more hours of the day but don't necessarily mean we are producing that much more.

"In technical terms, the government's statisticians may not be capturing the fact that we are putting in more hours than we are increasing output, so output per hour may not be growing as much as the government reports suggest."

Nor does enhanced technology itself necessarily drive productivity higher. Mr. Kellner cited a recent survey by CBSMarketWatch, where he is chief economist. It found that only 31% of respondents felt that Internet access had made them more productive and that 32% said they were less productive.

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