U.S. Economy Posts Modest Growth through Summer
Credit: Dan Smith
Credit: Dan Smith

Economic activity expanded at a moderate pace in most U.S. regions in July and early August, with stronger auto sales and improvements in retail spending and the housing sector helping offset weaker manufacturing performance.


The United States economy continued to improve through the summer, albeit slowly, posting gradual growth in most regions and positive performance in several key indicators, according to the Federal Reserve’s latest regional business survey findings. Automotive sales remained strong and the real estate market showed overall improvement. However, the manufacturing industry experienced a slowdown, raising concerns about the strength of the ongoing recovery.

According to the Fed’s Beige Book, economic conditions in the U.S. as a whole improved at a gradual pace in July and August, with six of the central bank districts reporting “modest” economic growth and three districts reporting “moderate” growth. Among the remaining districts, Philadelphia, Richmond and Boston reported slowdowns in key sectors.

The tepid growth rate was roughly in line with conditions from the previous reporting period in April and May, but marked a considerable decline from the gains made at the start of the year, when all 12 central bank district posted improvements in business activity.

The modest improvement in the summer months was largely driven by increases in retail activity, particularly auto sales, which increased in the majority of regions. In addition, all 12 districts reported increases in either home sales, housing prices or housing construction. Energy and mining were also strong and growing at a faster pace, although a drought across much of the U.S. has set back agricultural output.

“The economy is still struggling to gain traction more than three years after the end of the Great Recession in June 2009,” the Associated Press notes. “The Fed report said that six of its districts reported weaker demand in manufacturing. And it highlighted concerns about a severe drought affecting cotton, soybean and corn crops in its Chicago, St. Louis and Kansas City districts.”

Manufacturing was widely reported as “softening” in many districts, with two districts reporting that demand for manufactured goods was increasing at a slower rate and six districts reporting falling demand. However, the outlook for the future was more positive, as manufacturers in six districts forecast higher demand for goods in coming months.

Much of the recent weakness in manufacturing activity can be attributed to the ongoing European fiscal crisis, which has significantly hampered overseas demand for U.S.-made products and has been cited as a key concern by Boston, Atlanta and Chicago. Several districts also mentioned decreased demand from Asian markets as a factor slowing down manufacturing business.

Despite these troubling signs, employment in the manufacturing sector has remained relatively stable, with few manufacturing firms reporting major layoffs or hiring across all districts. In fact, some districts reported continuing difficulty in finding skilled workers.

“Demand was strongest for skilled manufacturing and engineering positions as well as IT services, and five districts reported difficulty meeting demand for truck drivers,” MarketWatch explains. “Despite increasing raw prices due to the drought and other factors, prices for finished goods were relatively stable.”

Capital spending remains largely unchanged among manufacturers, but many firms reported no increases in their investment plans. Financial concerns, particularly surrounding the upcoming “fiscal cliff,” have made manufacturers cautious about expansion.

“Rising uncertainty about the presidential election in November and fiscal policy in the United States are crimping growth… along with continuing fears about Europe’s debt problems and a slowdown in China’s once-booming economy,” the New York Times explains. “Many companies are holding off on expansion moves as they await the expiration of Bush-era tax cuts in January, along with budget reductions that are set to go into effect unless Congress comes up with a deal to cut the deficit.”

These issues may lead to another round of policy changes and further government efforts to stimulate the economy, as the Fed continues to evaluate the short-term outlook.

“Fed officials have indicated they may need to take new steps fairly soon to boost the fragile economic recovery unless growth substantially and convincingly picks up, according to minutes of the central bank’s last policy meeting,” the Wall Street Journal reports. “Fed officials are considering starting a new round of bond buying, known as quantitative easing, among other options.”

 

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Resources:
Summary of Commentary on Current Economic Conditions...
by U.S. Federal Reserve, Aug. 29, 2012
Fed Survey Finds Moderate U.S. Growth During Summer
by The Associated Press, Aug. 29, 2012
U.S. Economy Growing ‘Gradually’: Fed
by MarketWatch, Aug. 29, 2012
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