The Federal Reserve reported today that manufacturing production rose a solid 1.1 percent in April — the third increase in the past four months. This is an encouraging sign that the manufacturing recovery continued to gain steam entering the second quarter.

The April rise in manufacturing production was broadly based, with 17 of the 19 major manufacturing industries posting gains, up from 16 in March and nine in February. The upturn was likely driven by four factors: housing, business inventories, exports and business investment. Business inventories and housing likely will begin to moderate in the near-term as inventory stocks, which have been depleted, catch up with domestic demand and the recent surge in housing activity wanes following the end of the homebuyer tax credit. Exports and business investment likely will be more solid sources of growth moving forward. The global economy, especially in Latin America and Asia, is on the rebound, and American industry’s demand for equipment should start to improve in the second half of 2010 as we continue to see evidence that a self-sustaining recovery finally is emerging. Therefore, I expect the pace of the manufacturing recovery will moderate somewhat in coming months.

Manufacturers still have a lot of ground to make up. After falling 17 percent from December 2007 to June 2009, the level of manufacturing production remains 10 percent below its prior peak. Even if the pace attained over the past 10 months continues, manufacturing production will not reach is pre-recessionary peak until late 2011 at the earliest.

The Federal Reserve’s report today that manufacturing production increased by a strong 1.1 percent in November is a welcomed turnaround and signals that positive momentum is building in the industrial sector. With 15 of the 19 major manufacturing industries expanding last month, the November rise in factory output was the most widespread gain in three months. Still, the fact that upturns in manufacturing production have failed to reach a majority of manufacturing industries in three of the past six months shows that a broad-based economic recovery has yet to materialize for American industry. At this point, the emerging recovery is best described as fragile.

On a separate note, the Labor Department reported that finished producer prices rose by 1.8 percent in November, mainly due to a 6.9 percent rise in the price of energy goods. Outside of energy, prices rose a more modest 0.5 percent, the first increase in three months. An emerging global economic recovery is starting to put upward pressure on energy prices. Since the major economies of the world began to recover earlier this year in March, domestic energy prices at the producer level have increased at an annual rate of 34 percent. With a slack labor market suppressing wages, rising energy prices could again emerge as a significant problem for the U.S. economy just as a recovery is trying to take hold.

It was important for Treasury Secretary-designate to flatly state that China is manipulating its currency. Everyone knows China’s currency is being held at an artificially low level, and it is necessary for the United States Government to acknowledge this in order to be able to approach the problem realistically. (See New York Times and WSJ stories.)

The next step is more difficult – how to get China’s currency appreciating again. The currency appreciated 21 percent against the dollar through July 2008 and then went flat as Chinese authorities decided they were concerned about China’s slipping export performance in the slowing world economy. The fact of the matter is that China’s continued currency manipulation is hurting their own economy and making their transition away from export-led growth more difficult. Yuan appreciation can be win-win.

The Treasury Secretary-Designate is properly concerned with China’s currency and as the next step needs to work within established international means to find a solution. During the campaign, then-candidate Obama saw the importance of a change in China’s currency practices and said he would use all the diplomatic avenues available to seek such a change. Certainly the International Monetary Fund can play a stronger role than it has in the past.

Geithner’s statements showed he wants to get China’s currency moving, but without precipitating a new global financial crisis. Global financial stability and further appreciation of China’s currency can and should go hand in hand, but all this needs to be done carefully and in a way calculated to achieve both objectives and contribute to a lessening of global imbalances.

The yuan per dollar graph below shows how China’s currency was moving until July 2008, and then was held flat.