Mixed Signals on U.S. Economic Growth this Spring
June 14, 2012
The U.S. economy maintained a moderate pace of growth in most regions of the country in April and May, with steady hiring and factory output in most U.S. districts, according to the Federal Reserve. However, the findings are inconsistent with recent data that show hiring has slowed and manufacturing has cooled.
Economic growth in the United States picked up at a “moderate pace” from early April to late May, with only one district reporting slower growth during the period, according to the latest reports from the 12 Federal Reserve districts.
Released eight times a year, the Fed’s latest summary of national business activity indicates growth in each of its 12 bank districts. Growth was moderate or modest in 10 districts, steady in the Boston district and slowed slightly in the Philadelphia region.
The central bank’s Beige Book report was generally more upbeat than expected, inconsistent with recent data that show payrolls grew at the slowest pace in a year last month and manufacturing cooled.
“I was surprised,” John Canally, an economist for LPL Financial, said in a MarketWatch interview. “I would have expected a more downbeat Beige Book in line with the data that has been weak relative to expectations.”
Hiring was reportedly steady or rose modestly during the April-May period, according to the Fed. That’s in stark contrast to the U.S. Department of Labor's latest monthly employment report, which showed that employers added the fewest jobs in a year in May, driving the unemployment rate up to 8.2 percent from 8.1 percent in April.
While economists expected more signs of a drop in momentum due to recent reports of slower expansion, the Fed’s findings indicate that manufacturing continued to expand in most districts during the period.
“Manufacturing continued to expand, and most districts reported gains in production or new orders,” the Beige Book reports. “The only exceptions were from the Philadelphia, Richmond and St. Louis districts, where factory activity was mixed or had softened slightly.”
According to the Institute for Supply Management (ISM) earlier this month, manufacturing in the U.S. grew at a slower pace in May as factories tempered production and pared inventories in response to weakness in the global economy. The ISM’s factory index fell to 53.5 after reaching a 10-month high of 54.8 in April, with readings above 50 signaling growth.
The Fed report “is clearly at odds with the hard data we’ve been seeing,” Millan Mulraine, senior U.S. strategist at TD Securities, told Bloomberg News. “We’ve seen a dramatic slowdown in economic growth momentum that you’d think would be reflected in a few, if not the majority, of districts.”
The Beige Book did point to some weakness in the economy. Consumer spending was flat or increased only slightly in almost all districts, a trend that could restrain future growth, as consumer spending accounts for 70 percent of the nation’s economic activity.
Nevertheless, new vehicle sales remained strong and sales of used automobiles held steady, according to the Fed. Steel manufacturing was robust, with contacts in the Chicago district reporting the highest capacity utilization rates since the end of the recession, and firms in the St. Louis and Minneapolis districts voiced plans to upgrade or expand operations.
Hiring at manufacturing firms was mixed, but manufacturers in some districts reported difficulty finding qualified workers such as welders. According to the U.S. Department of Labor earlier this month, manufacturing employment continued to trend up in May, adding 12,000 jobs compared to 9,000 in April. Job gains in manufacturing averaged 41,000 per month in the first quarter of 2012, according to the Labor Department.
Meanwhile, energy production and exploration continued to expand, except for coal producers, who noted a slight slowdown in activity.
Conditions in residential and commercial real estate also improved. Construction picked up in many areas of the country. Lenders in most districts noted an improvement in loan demand and credit conditions. Capital spending plans in most reporting districts were positive.
“Economic outlooks remain positive, but contacts were slightly more guarded in their optimism,” the Fed said. Manufacturers were concerned that a slowdown in Europe and domestic political uncertainty may affect future business decisions.
In addition to the districts’ concerns, the central bank will also have to grapple with recent changes in economic prospects.
“At its last meeting in late April, Fed policymakers slightly upgraded their forecasts. They projected growth at about 2.7 percent this year, up from 2.5 percent in January. They also nudged down their unemployment rate forecasts to just below 8 percent,” the Associated Press reports. “Wall Street economists, however, have since moved in the other direction, particularly in light of the dismal jobs report. Many now expect the economy to expand by only about 2 percent this year, down from earlier estimates of 2.5 percent.”