Economists say that today’s data on U.S. productivity and jobless claims point to a recovery, but they are not ready to sound the all clear just yet.

The U.S. Labor Department said that productivity increased at the fastest rate in nine months during the second quarter. Non-farm business productivity grew 5.7%, the biggest increase since the third quarter of 2002. As well, labour costs dropped 2.1%

In a separate release, the Labor Department reported that initial jobless claims dropped by 3,000 to 388,000 in the week that ended Saturday. That was the lowest in six months.

“U.S. productivity and costs data for Q2 are from another planet,” commented BMO Nesbitt Burns. “Aside from the headline figures, the year-to-year trends need to be addressed. Productivity rose at an astonishing 3.8% rate over the last year and labour costs fell 1%. However, it is too bad that non-labour costs rose 4.1% or we would be looking at an ever faster surge in profits.”

Nesbitt noted that jobless claims recorded the third week in a row below 400,000, and that the closely watched four-week average also slipped below 400,000 for the first time since early this year. “We are about one week away from being absolutely convinced that U.S. labour markets are turning around,” it said. “The fly in the ointment is that early July claims were up and the recent weeks could still represent statistical payback rather than a true firming of labour market conditions. July claims data are always suspect.”

“New jobs are a necessary requirement for the recovery to extend into the fourth quarter and 2004, so this release is a small bit of good news on that front,” confirmed RBC Financial. “However, many more months of improvement are needed before we can even begin to think about anything but a Fed on hold.”

RBC also noted that as long as the economy is growing, the flipside to a lousy labour market is often better productivity growth. “Outstanding productivity growth is good in the long run, but recently it has shown its darker underbelly as it suggests firms can boost output without hiring more workers. Unlike in the latter half of the 1990s, recent productivity gains have come at the expense of new jobs, leaving the medium-term impact unclear.”

“Yes, high productivity growth reinforces the notion that the U.S. may still be the best place to put your investments to work. These numbers suggest the U.S. economy can grow at trend (around 3%) without new hiring provided existing workers are willing to go on killing themselves doing the work of their former, now laid-off, colleagues,” RBC said. “This would keep the recovery on a knife-edge, because if the job market doesn’t turn around with strength soon, recent perhaps overly optimistic market gains could dissipate rather quickly as the economy meanders along for several more quarters.”