Mid-Atlantic Manufacturing Surges as the Recovery Picks Up Speed

Manufacturing activity in the Mid-Atlantic region unexpectedly rose in December to it strongest growth rate since April 2005. If the nation's industrial core is any indicator, the U.S. economic recovery is picking up speed.

The Federal Reserve Bank of Philadelphia's Business Outlook Survey, commonly known as the Philly Fed survey, increased to 24.3 in December from 22.5 in November.

A Bloomberg survey had expected the index to fall to 16 in December. Readings above zero indicate an expansion; below zero, a contraction. The Philly Fed survey and index typically provide an early read on larger economic surveys released later, such as the Institute for Supply Management's manufacturing survey and services survey.

A Bullish Sign?

Several of the key Philly Fed index components rose substantially in December. The closely followed new orders component -- a measure of future demand -- increased to 14.6 from 10.4 in November -- with the positive reading pointing to an increase in orders.

The shipments component, however, fell to 7.3 from 16.8 November. That can be interpreted as a negative, but in the context of rising new orders, it suggests that orders are outpacing manufacturers' and wholesalers' ability to meet those orders with shipments -- and that's a bullish sign for future production gains and employment growth.

The survey's employment component also declined -- to 5.1 from 13.3 in November -- but it's still at a level indicating businesses are adding employees. Also, the average workweek component rose to 19.3 from 10.9 in November.

The prices-paid component surged to 51.2 from 34 in November and prices-received jumped to 10.7 from from minus 2.1 in November. The pair indicate companies are able to get the prices they want for their goods/services, but simultaneously, their costs also are rising.

Looking longer term, most companies continue to expect growth in their businesses over the next six months. The Philly Fed's future activity index remained positive for the 24th consecutive month, increasing to 50.5 from 49 in November.

Health Care Cost Will Likely Rise

December's special section asked companies about their expectations for changes in selected input and labor costs for the year ahead.

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Similar to previous years, the largest annual increase in costs for businesses is anticipated to be health care benefits (which are expected to rise 8.6% in the year ahead), followed by raw materials (+3.9%), energy (+3.1%), intermediate goods (+2.7%), wages (+2.3%), and non-health care costs (+2.1%).

The December Philly Fed survey was yet another upbeat report on the U.S. economy. The top-line index rose substantially, and the key components showed strength.

Given improvements in other important economic metrics (industrial production, international trade, retail sales and jobless claims), the picture is clear: The U.S. economic recovery is accelerating, and corporate revenue and earnings in the fourth quarter are likely to come in better than expected for many, if not most, companies.

However, the one vitally important piece that's missing is domestic job growth. New-job creation will have to hit 150,000 to 200,000 a month steadily before the recovery can progress to the level of a self-sustaining expansion.
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