Fed Says Labor Market Strengthened on Manufacturing, Retail

The Federal Reserve said the labor market improved throughout the country early this year, driven by rising retail sales and “solid growth” in manufacturing.

“Labor market conditions continued to strengthen modestly, with all Districts reporting some degree of improvement,” the Fed said today in its Beige Book report, an anecdotal account of the economy released two weeks before meetings of the Federal Open Market Committee. Its last survey, released Jan. 12, said the job market was “firming somewhat.”

Overall, the economy “continued to expand at a modest to moderate pace,” the central bank said in Washington. Eleven of the Fed’s 12 regional banks, including San Francisco and Philadelphia, described their regions as expanding, improving or experiencing moderate growth. Only Chicago reported growth “at a pace not quite as strong” as before.

Fed policy makers at their last meeting in January took a more optimistic view of the economy while maintaining their dissatisfaction with job growth. Policy makers, who are pressing ahead with their plan to buy $600 billion in Treasuries through June, raised projections for economic growth this year and made little change to forecasts after 2011 for unemployment and inflation.

The Beige Book reported that all districts except St. Louis “experienced solid growth in manufacturing production” and noted an increase in retail sales in every district except Richmond and Atlanta.

‘Just Great’

“The manufacturing sector is doing just great,” Michael Moran, Chief Economist at Daiwa Securities America Inc., said in an interview on “Bloomberg Bottom Line” with Mark Crumpton, adding that the report wouldn’t dissuade Fed Chairman Ben S. Bernanke from completing the asset-purchase plan, known as QE2 for the second round of quantitative easing.

“He’s planning to go ahead with QE2,” said Moran. “There’s nothing in the Beige Book today which would suggest they should back away from that either.”

The Standard & Poor’s 500 Index rose 0.2 percent to 1,308.44 at the 4 p.m. close of trading in New York. The yield on the 10-year Treasury note rose to 3.47 percent as of 4:48 p.m. in New York, from 3.39 percent yesterday.

The Beige Book followed a report earlier in the day from ADP Employer Services showing that U.S. companies added more workers in February than forecast by economists. Employment increased by 217,000 after a revised 189,000 gain in January. The median estimate in the Bloomberg News survey called for a gain of 180,000 last month.

Jobs Report

The Labor Department will report March 4 that the world’s largest economy added 190,000 jobs in February, the most since May 2010 when the government was hiring to conduct the decennial census, according to the median forecast of a Bloomberg News survey. The unemployment rate will rise to 9.1 percent.

Bernanke, in congressional testimony today, said he’s still not satisfied with the strength of the recovery from a recession that the National Bureau of Economic Research describes as the longest since the Great Depression.

“The economy’s recovery is not firmly established, and we think monetary policy needs to be supportive,” Bernanke said in semiannual testimony to the House Financial Services Committee.

Responding to a question, Bernanke said the Fed’s policy of keeping its benchmark rate near zero for an “extended period” helps provide support to the economy, “which in our judgment, it still needs.”

Economies Growing

The Beige Book’s characterization of growth was little changed from January, when six Fed regions, including Atlanta and Chicago, showed local economies expanding “modestly to moderately,” and four, including New York and Boston, reported “improving” conditions.

The Commerce Department last week reduced its estimate of fourth-quarter growth to a 2.8 percent annual pace from 3.2 percent as state and local governments made deeper cuts in spending. Consumer purchases rose at a 4.1 percent rate, the most since 2006, providing a boost for retailers.

Last week Target Corp., the second-largest U.S. discount retailer, projected sales at stores open at least a year may rise as much as 5 percent this year, after a 2.1 percent gain the prior period.

“Retail spending strengthened compared with a year ago across all Districts except Richmond and Atlanta,” today’s report said, while noting that winter weather “had a negative impact on retail activity” in Boston, New York, Philadelphia, Atlanta, Kansas City and Dallas.

The Beige Book report released today reflects information collected on or before Feb. 18 and summarized by the Atlanta Fed.

Labor Demand

Boston, Cleveland, Minneapolis, and Dallas cited “noticeable improvements” in manufacturing, and Boston and Cleveland “also observed increased labor demand in the health- care and medical sectors,” the report said.

Four districts, including Dallas and Boston, described the manufacturing outlook as “optimistic” and four, including Philadelphia and Atlanta, reported “more rapid improvement in factory orders.”

Manufacturing grew in February at the fastest pace in almost seven years, driven by gains in orders, employment and exports that signal factories will continue to propel the expansion, according to a report this week from the Institute for Supply Management.

Auto dealers are seeing improved demand. General Motors Co. yesterday said U.S. sales of its four remaining brands rose 49 percent in February, topping analysts’ estimates.

Berkshire Hathaway

Berkshire Hathaway Inc.’s quarterly profit rose 43 percent to the highest since 2007, boosted in part by Chairman Warren Buffett’s purchase last year of Burlington Northern Santa Fe, the second biggest railroad in the United States.

The Beige Book described the real estate market as “varied, but overall sales and construction remained at low levels across all districts.”

The improvement in the job market has not translated to pay increases, the report said, describing wage pressures as “minimal across all Districts.”

The report noted that “non-wage input costs increased for manufacturers and retailers” and that many manufacturers “reported having greater ability to pass through higher input costs to customers.”

“Retailers in some Districts mentioned they had implemented price increases or were anticipating such action in the next few months,” the Fed said.

Price Gauge

The Fed’s preferred price gauge, which excludes food and fuel, rose 0.8 percent in January from a year earlier, matching December’s year-over-year gain, the lowest in five decades of record-keeping. Fed officials aim for long-run overall inflation of 1.6 percent to 2 percent.

Oil and crop prices have soared even as core inflation has remained low. The price of gasoline, among the most visible expenses consumers, has risen 25 percent in the last year, according to an index from the American Automobile Association.

Experience with such price gains in recent decades, along with currently stable labor costs, suggests a “temporary and relatively modest increase in U.S. consumer price inflation,” Bernanke told Congress today.

To contact the reporter on this story: Joshua Zumbrun in Washington at jzumbrun@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz in Washington at cwellisz@bloomberg.net

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