Overall economic activity continued to expand at a moderate pace in most U.S. regions in the early months of 2011, with rising demand for manufactured goods.

The United States economy continued to improve in the early months of 2011, posting steady growth in most regions despite severe winter weather conditions that slowed some indicators. Both retail sales and manufacturing are on an upswing, with factory orders continuing to rise, although concerns remain about increasing costs and other sources of pricing pressure.

According to the Federal Reserve’s latest regional business survey findings, the Beige Book, economic conditions as a whole improved “at a modest to moderate pace” in January and early February, with all 12 of the central banks’ districts posting a pickup in business activity. Only the Chicago region reported a slowdown in the rate of expansion, though business activity did increase in the area.

U.S. economic conditions were generally better than in the previous reporting period, with more districts posting growth. The gains were largely due to stronger performance in the retail and manufacturing sectors, although disruptions due to inclement weather were common in the first two months of the year.

Eleven of the 12 major districts said that manufacturing activity improved since the previous reporting period. Cleveland, Atlanta, Minneapolis and Kansas City all experienced “solid expansion” in production, while Chicago cited a modest slowdown in output growth. St. Louis was the only region that experienced contraction in manufacturing activity, largely due to factory closings.

Expectations for the future are also improving. “Philadelphia and Atlanta noticed that a higher percentage of contacts indicated that production levels would increase in the near term,” the Beige Book explains. “Boston, Cleveland, Kansas City and Dallas also described the manufacturing outlook as optimistic.”

Consumer spending was robust, with growth reported in every district except Atlanta and Richmond, where sales “softened modestly.” Despite the improvements, Boston, New York, Philadelphia, Atlanta, Kansas City and Dallas noted that weather conditions had impeded some of their retail activity. Several districts reported that consumers are still responding positively to promotions and discounting, with Cleveland, Chicago and San Francisco citing higher demand for big-ticket items.

Auto sales improved year-over-year in the majority of districts, with Cleveland and Chicago in particular reporting stronger demand due to the greater availability of auto financing. According to the Beige Book, all districts “conveyed optimistic outlooks” for the automotive industry.

However, the survey also indicated rising concerns over inflationary pressure. Costs appear to be increasing for manufacturers and retailers alike, forcing some businesses to ease the burden through pricing.

“Manufacturers in many districts conveyed that they were passing through higher input costs to customers or planned to do so in the near future,” the Beige Book explains. “Homebuilders in the Cleveland and Atlanta districts noted rising material costs, but acknowledged little ability to pass through the costs to buyers. Retailers in some districts mentioned they had implemented price increases or were anticipating such action in the next few months.”

Labor market conditions improved modestly, with every district reporting some pickup in employment, largely due to rising labor demand in manufacturing, health care and the medical industry. However, employment still lags far behind other economic indicators.

“Fed policymakers at their last meeting in January took a more optimistic view of the economy while maintaining their dissatisfaction with job growth,” Bloomberg News reports. “Policymakers, who are pressing ahead with their plan to buy $600 billion in Treasuries through June, raised projections for economic growth this year and made little change to forecasts after 2011 for unemployment and inflation.”

Despite signs of higher costs being passed on to consumers, demand for manufactured goods remains strong. New orders for manufactured goods, up six of the last seven months, rose 3.1 percent ($13.6 billion) to a total of $445.6 billion in January, according to the U.S. Department of Commerce last week. Excluding the often-volatile transportation sector, new orders increased 0.7 percent in January.

Orders for non-defense capital goods (excluding aircraft), which serve as an important gauge for future business investment plans, fell 6.2 percent in January, the largest monthly decrease in a year.

“The big January drop followed two months of strong gains in business investment spending and was seen as a temporary setback,” the Associated Press reports. “Economists believe business investment will get a boost this year from a new tax break which provides for full write-offs for capital equipment purchases made this year.”

Earlier

U.S. Economic Climate Warming Up

Factory Orders Increase in December

Resources

Full Report: Current Economic Conditions
The Federal Reserve Board, March 2, 2011

Fed Says Labor Market Strengthened on Manufacturing, Retail
by Joshua Zumbrun
Bloomberg News, March 2, 2011

Full Report on Manufacturers’ Shipments, Inventories and Orders – January 2011
U.S. Department of Commerce, March 4, 2011

Factory Orders up in January, Helped by Airplanes
The Associated Press, March 4, 2011