Fed Beige Book Shows Continued Modest Growth

By February 29, 2012Economy

In a report that mostly mirrors last month’s, the Federal Reserve Board’s Beige Book says that “overall economic activity continued to increase at a modest to moderate pace in January and early February.” Moreover, it highlights the recent uptick in manufacturing activity, with higher levels of new orders, shipments and production reported in many Districts. It specifically cites strength in the automotive and metal manufacturing sectors, with some weaknesses among chemical, paper product, household goods and building materials manufacturers.

A number of regions also expect increases in capital spending, coinciding with the more positive outlook. Yet, manufacturers “in the Boston, Philadelphia, and Cleveland Districts expressed concern about the risks posed by the situation in Europe.” Indeed, uncertainty about European sovereign debt crisis has been at the forefront of a lot of manufactures’’ minds lately.

Most of the responding Districts said that hiring was increasing, particularly among manufacturers. Finding skilled workers, though, remains a challenge for some of these Districts. Regarding inflation, the Federal Reserve feels that wage and final goods prices were “relatively stable.” With that said, there has been some recent pricing pressures among manufacturing with rising raw material prices and higher employee benefit costs, much of which cannot be passed along to the consumer right now.

Much of this analysis closely aligns with Chairman Ben Bernanke’s testimony earlier today at the House Committee on Financial Services. He noted that manufacturing produced rose 15 percent since the depths of the recession. He also continued to worry about developments in Europe and the threats posed by possible losses to liquidity if global financial markets were to be disrupted, in which he said that he expected the recent run-up in energy costs to be temporary.

Most notable, though, were his comments on recent inflation:

“A surge in the prices of oil and other commodities, along with supply disruptions associated with the disaster in Japan that put upward pressure on motor vehicle prices, pushed overall inflation to an annual rate of more than 3 percent over the first half of last year. As we had expected, however, these factors proved transitory, and inflation moderated to an annual rate of 1-1/2 percent during the second half of the year–close to its average pace in the preceding two years. In the projections made in January, the Committee anticipated that, over coming quarters, inflation will run at or below the 2 percent level we judge most consistent with our statutory mandate. Specifically, the central tendency of participants’ forecasts for inflation in 2012 ranged from 1.4 to 1.8 percent, about unchanged from the projections made last June. Looking farther ahead, participants expected the subdued level of inflation to persist beyond this year. Since these projections were made, gasoline prices have moved up, primarily reflecting higher global oil prices–a development that is likely to push up inflation temporarily while reducing consumers’ purchasing power. We will continue to monitor energy markets carefully. Longer-term inflation expectations, as measured by surveys and financial market indicators, appear consistent with the view that inflation will remain subdued.”

Overall, the Chairman’s remarks – along with the Beige Book – reflect an economy that is improving but still showing signs of weakness, particularly with high unemployment and continued challenges in the housing market. But, manufacturing is a bright spot, with higher activity and an upbeat outlook for the coming months.

Chad Moutray is chief economist, National Association of Manufacturers.

Chad Moutray

Chad Moutray

Chad Moutray is chief economist for the National Association of Manufacturers (NAM) and the Director of the Center for Manufacturing Research for The Manufacturing Institute, where he serves as the NAM’s economic forecaster and spokesperson on economic issues. He frequently comments on current economic conditions for manufacturers through professional presentations and media interviews. He has appeared on Bloomberg, CNBC, C-SPAN, Fox Business and Fox News, among other news outlets.
Chad Moutray

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