Industry Market Trends

Manufacturing Drives Economic Growth in Early 2012

Mar 08, 2012

Economic activity expanded at a moderate pace in most U.S. regions in January and early February, with particularly strong performance in the manufacturing industry, the Federal Reserve reports.

The United States economy continued to improve in the early months of 2012, posting steady growth in most regions and positive performance across a range of indicators, according to the Federal Reserve's latest regional business survey findings. Factory production rose, retail sales increased, more jobs were created and home sales began to improve in January and early February, boosting the economic prospects for the rest of the year.

According to the Fed's Beige Book, economic conditions as a whole improved "at a modest to moderate" pace in the first two months of 2012, with all 12 of the central bank districts posting a rise in business activity. Only the New York district reported a slowdown in the expansion rate, though business activity did increase in the region.

Economic growth was roughly in line with the conditions reported toward the end of 2011, but was generally better than in the previous reporting period for October and mid-November, when the economy improved at a "slow to moderate" pace.

The most recent gains were largely driven by growth in manufacturing. Manufacturing business activity rose in all 12 districts, with the majority reporting increases in new orders, shipments or production.

Capital spending rose in the Boston, Richmond, Chicago, Kansas City, St. Louis, Minneapolis and Dallas areas, especially in automotive-related industries. San Francisco reported continued investment in information technology equipment, while primary metal manufacturing showed strong growth in Philadelphia, St. Louis and Dallas. Steel shipments climbed in the Cleveland district and specialty metal orders increased in Chicago.

Despite these gains, there were some negative signs for U.S. manufacturing. Manufacturers in Boston, Philadelphia and Cleveland expressed concern about the risks posed by the financial crisis in Europe, while other regions reported downscaling in certain industries.

"In contrast to the many positive reports, contacts in some districts reported plans to decrease operations and close plants," the Federal Reserve notes. "Contacts in chemical and paper product manufacturing in the St. Louis district reported plans to close plants and lay off workers, while manufacturers of household goods and building materials reported soft demand on average in the Chicago district."

Consumer spending remained strong in January and February, except in sales of seasonal goods. The short-term sales outlook was also positive, with retail sales in Philadelphia, Atlanta, St. Louis, Minneapolis and Kansas City higher than year-earlier sales. Gains in auto sales were reported in Philadelphia, Atlanta, St. Louis and Minneapolis, while Chicago reported sales were up in January but down slightly in early February.

The long-stagnant housing market also improved, with most districts reporting modest increases in residential real estate activity, while commercial real estate gains were less widespread. Construction activity rose in Boston, Atlanta, Chicago, Minneapolis, Dallas and San Francisco.

Labor market conditions also saw modest improvement in January and February, with the majority of districts reporting a slight uptick in hiring. Boston, New York, Cleveland, Richmond, St. Louis and Minneapolis posted increased hiring in manufacturing, while businesses in Philadelphia, Atlanta and Kansas City expect future hiring in the manufacturing sector. Some of these gains may be attributed to talent shortages.

"Most districts saw a 'slight increase' in hiring, in part because employers in some areas, including Boston, Cleveland, Richmond and Chicago, were having difficulty finding skilled workers," Bloomberg News notes. "The U.S. jobless rate fell to 8.3 percent, the lowest in three years, in January, with the 243,000 increase in payrolls including gains in manufacturing, construction, temporary help agencies, accounting firms, restaurants and retailers."

Growing momentum in U.S. economic performance is likely to shape financial policy both in the short-term and long-term. Recent quarterly gains have reduced the likelihood of additional stimulus efforts.

"U.S. economic growth for the fourth quarter was revised up to 3 percent...but forecasters see the first quarter's rate coming in closer to 2 percent," Reuters reports. "Fed officials have been debating another possible round of monetary stimulus through bond purchases, but some improvement in the outlook in recent weeks has dampened the prospect for such action."