The Associated Press

WASHINGTON - The productivity of America's workers grew modestly in the final three months of 2003, raising hopes that companies will step up hiring to meet demand rather than relying solely on increased efficiency.

The Labor Department reported Thursday that productivity - the amount an employee produces for every hour on the job - grew at a 2.7 percent annual rate from October through December. Although that was a slowdown from the 9.5 percent rate for the three previous months, it was a respectable pace, analysts said.

"You can squeeze only so much juice out of an orange. There is no question that businesses - seeing demand grow - are hiring more people in response to slowing productivity gains," Wells Fargo's chief economist Sung Won Sohn said. "But how many people will be hired going forward - that is really a debatable question."

For all of 2003, productivity grew by 4.2 percent, following a 4.9 percent increase in 2002.

Productivity gains are important to the economy's long-term vitality. They allow the economy to grow faster without setting off inflation. Companies can pay workers more without raising prices, which would eat up those gains.

As profits improve, companies might be more willing to boost capital investment and hiring.

Economists are predicting that the nation's payrolls grew by around 180,000 jobs in January, compared with a net gain of 1,000 jobs in December. The government is to release the employment report for January today. .

In another report, new claims for unemployment benefits rose last week by a seasonally adjusted 17,000 to 356,000, the Labor Department said. Some of the increase was related to bad weather in some states, which caused weather-sensitive companies to lay off workers, a government analyst said.

Even with the rise, claims have been below 400,000 for 18 straight weeks, a sign the pace of layoffs is stabilizing, analysts said.