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 At the same time, wage pressures eased with unit labor costs dropping at an annual rate of 0.2 percent, the best showing in more than a year.
Both outcomes were far better than had been expected and should relieve some of the concerns that a remarkable surge in productivity that began in the mid-1990s was in danger of being reversed.
The slight drop in wage pressures was especially welcome after hefty increases over the past four quarters. Rising wages are good for workers but if they are not accompanied by strong productivity gains, they raise concerns among Fed policymakers about inflation.
The 0.2 percent decline in unit labor costs in the third quarter followed a 2.2 percent increase in labor costs in the second quarter and even bigger jumps of 5.2 percent in the first quarter and 10.3 percent in the fourth quarter of last year.
Productivity is the key ingredient for rising living standards. It allows employers to pay workers higher wages which are financed by the increased output. That means employers don't have to resort to raising the price of their products which can lead to higher inflation.
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 The Federal Reserve last week cut a key interest rate for the second time in two months while at the same time expressing concerns that inflation remained a problem, especially in light of rising oil prices. Crude oil prices have soared in recent weeks over concerns about rising tensions in the Middle East, hitting a record $96.70 per barrel on Tuesday.
Fed Chairman Ben Bernanke is scheduled to testify on the economic outlook on Thursday before Congress' Joint Economic Committee. That testimony will be closely scrutinized for any signs that the Fed may cut rates again should the economy should more signs of faltering.
Economists say that the next six months represent the point of maximum danger that the economy could slip into a recession brought on by the steepest slump in housing in more than two decades, a severe credit crunch and surging oil prices.
[Associated Press; By MARTIN CRUTSINGER]
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