U.S. worker productivity grew at the slowest pace in nearly two years during the third quarter of 2004. Non-farm business productivity grew at a seasonally adjusted annual rate of 1.9% from July through September, the lowest rate since the fourth quarter of 2002, the Labor Department said today.

In year-on-year terms, the increase was 3.1%, the lowest rate since the first quarter of 2003.

Economists had called for a 1.5% increase in the third quarter. However, the growth rate was just half the second-quarter growth rate.

In the last few years, U.S. labour productivity growth it has allowed employers to make do with fewer workers. Since the summer of 2003, employers have replaced just two-thirds of the 2.7 million non-farm jobs cut in the previous two-and-a-half years.

Today’s report showed that the growth of workers’ output slowed a bit despite a sharp acceleration in the growth of workers’ hours. For non-farm workers, output grew 4.1% in the third quarter after a 4.2% increase in the second quarter. But workers’ hours rose 2.1%, the biggest increase in five years.

The productivity slowdown caused labor costs to grow at a faster clip. Unit labor costs rose 1.6%, up from a 1% increase in the second quarter, the Labor Department said.

In a separate release, the Labor Department said initial jobless claims fell by a larger-than-expected 19,000 to a seasonally adjusted level of 332,000 in the week that ended Oct. 30. That reversed nearly all of the previous week’s increase. The four-week average fell by 1,500 to a six-week low of 342,000.

Meanwhile, sales at U.S. retailers improved in October, with luxury department stores seeing bigger gains than discounters. Wal-Mart, the world’s largest retailer, said its October same-store sales rose 2.8%.