Productivity in the United States rose at 5% in the final quarter of 1999, maintaining its fastest pace for seven years.

The increase, which was a faster rate than expected, followed a revised 5% gain in the third quarter.

For the whole of 1999, labour productivity was up 2.9%, the strongest annual rise since 1992. These figures exclude those working in the farm sector.

Labour costs fell 1.0% in the fourth quarter, compared with a 0.3% fall in the third quarter.

The figures suggest benign inflationary pressures, weakening the case for further rises in US interest rates.

Rising productivity can help keep inflation low by allowing businesses to boost their output of goods and services without higher labour costs.

Manufacturing surge

Productivity in the manufacturing sector, which has been recovering from a slump, rose 6.4% in 1999 -- the fastest productivity in the sector since a 6.9% gain in 1971.

Productivity increases have been strong in recent years, due in large part to improvements in technology - helping keep inflation in check while the economy expands.

Those productivity gains have led many economists to believe the economy can now grow at a faster pace than before without fanning inflation.

Analysts welcomed the figures, though some urged caution.

"These are spectacular numbers, better than the GDP and employment reports suggested, and confirm that the labour market is not at the moment the source of anything that could be plausibly described as inflationary pressure," said Ian Shepherdson of High Frequency Economics.

But he foresaw a problem if the economy simply ran out of usable workers, driving up wages at a faster rate.

"This is an impressive combination of extremely tight labour markets and extremely well-behaved labour costs, and that is the reason why the Fed (Federal Reserve) will continue moving at a very cautious pace," said Anthony Karydakis of Bank One Capital Markets.

The US government has now revised its long-term forecast for the US economy, partly on the basis of these trends. It now says the economy can grow on average by 2.5% each year, an increase of 0.25%.

Even that small change, however, has added over $1 trillion to the projected US budget surplus over the decade - an indication of how important productivity can be to the economy.