Fed finds modest growth

Manufacturing, autos keep pace

The U.S. economy is improving at a “modest to moderate” pace as solid auto sales and growth in high-tech manufacturing outweigh the effect of high gasoline prices for now.

The Federal Reserve made those observations Wednesday in its “beige book” summary of business conditions in the 12 Federal Reserve Bank districts. The generally optimistic tone of the report, which is based on surveys of business people and economists between mid-february and April 2, contrasted with the downbeat tone of Friday’s March jobs report. That showed a drop in hiring, even as the unemployment rate fell to 8.2% from 8.3%.

“This means there’s no sign the jobs report was an ‘Oh My God, this-is-the-start-of-really-bad-news’ ” moment, says John Canally, economist at LPL Financial. “It says that things otherwise are really mostly steady-eddie.”

The report mentions oil or fuel prices 42 times, up from 17 in February and only nine in January, indicating rising worries about energy prices, according to an analysis prepared by Canally. Business people are getting less worried about fallout from the European financial crisis, which the Fed mentioned only six times, down from 16 in each of the last two beige books.

The impact of petroleum prices is beginning to show itself in the farm sector, the Fed said. Business people in the San Francisco Fed District said fertilizer costs are rising, while Chicago reported tight supplies of some agricultural chemicals. Energy companies are also shifting dollars to explore for oil as the price of natural gas drops sharply, the Fed said.

The Fed typically releases a beige book about two weeks before the next meeting of the Federal Open Market Committee, which uses the survey in deciding interest rate policy. The next meeting is April 2425. “This confirms that it’s a strengthening economy, and that takes pressure off the Fed” to pump money into the financial system by selling bonds or other open-market operations, says Moody’s Analytics economist Eduardo Martinez.

The report was the first beige book in a year to cite improving conditions in all 12 Fed districts, Martinez says. While a warmer-than-usual winter buoyed the economy, and some growth in the winter may have simply shifted demand from later in the year, he says there is welcome strength in areas such as commercial construction.

One notable weak spot was increased reliance on temp workers in Southern states, where employers are awaiting better economic conditions before making permanent hires, the Fed said.

Worker shortages in technical and skilled-labor fields are good news, Martinez says: “It was interesting that it was common to every growing, robust industry in an economy with 8% unemployment.”