'This Recovery Is Really Taking Hold'

Philadelphia skyline
Philadelphia skyline

An often little-noticed survey by the Federal Reserve in the Philadelphia region has given convincing evidence that America's manufacturing sector is strongly bouncing back from the recession. Not only are firms reporting booming activity, strong shipments of goods and more unfilled orders, but jobs are being created at the highest rate in 38 years.

The Philly Fed's survey, called the Business Outlook Survey of manufacturing activity, said its diffusion index, the broadest measure of manufacturing activity in the region, had increased from 19.3 in January to 35.9 in February. That's the highest reading since January 2004, almost three years before the start of the recession.

David Resler, chief economist for Nomura Securities International, says the report "represents another -- indeed arguably the most -- encouraging indicator from the manufacturing sector since well before the Great Recession began three years ago."

"Considerably Healthier"

While cautioning that some of the uptick could represent business that was lost during the winter storms in January coming back in February, Resler says the fact that employment was also up sharply indicates "that the economy has got some pretty decent momentum developing, and things are considerably healthier than they were a year ago."

Joel Naroff, an economist based in the Pennsylvania region, says when he speaks to local businesses, it soon becomes clear that what's happening is a broadening of the manufacturing base.

"The implication of this survey is that this recovery is really taking hold. We're ready to shift into the next level, where growth begins to accelerate," Naroff says. "I think this is a precursor for broader-based employment, and then, a few months after that we're likely to see consumer confidence go up enough that we get good demand."

Fewer Layoffs, More Hiring

Both Naroff and Resler believe the Philadelphia numbers reflect a national trend that will become evident when the Institute of Supply Management reports its national manufacturing survey data at the beginning of next month.

"There is more underlying demand in a wider variety of areas than we understand right now," Naroff says. "This is a truly broad-based recovery going on."

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The employment index increased from 17.6 to 23.6, a rise of six points and the highest level the index has reached since May 1973. The number of firms indicating they were laying off workers declined, and the number of firms that were hiring workers increased modestly.

Those numbers were consistent with the jobless claims numbers reported Thursday, which showed a rise in claims from 385,000 to 410,000. Resler says the increase was likely due to a bounceback from the bad winter storms.

"The takeaway for me from the jobless claims numbers is that we are still in a gently falling trend of claims reflecting a moderately improving job market," says Resler.

Some 45.5% of respondents to the Philly Fed survey said business activity improved over the month, indicating that the recovery wasn't concentrated in any particular industry. Philadelphia isn't known for car manufacturing, for example, so the recent climb in auto sales doesn't account for the general increase in sentiment.

Deflation Defeated

The rising economic sentiment could have far-reaching implications for U.S. monetary policy. Last year, the Fed began buying $600 billion in government bonds in hopes of keeping falling inflation from becoming deflation, a deadly downward price spiral, and preventing the economy from entering a double-dip recession.

Both goals seem to have been achieved. Consumer prices went up 0.4% in January, or 0.2% if food and energy are excluded. That indicates deflation is no longer a significant worry.

Most economists now estimate the economy will grow by 3% to 3.5% this year, which is much stronger than was feared at the middle of last year when the Fed started talking about buying bonds in a program known as quantitative easing. Critics have maintained that Fed Chairman Ben Bernanke has stoked worldwide inflation, but raising inflation was part of Bernanke's goal and he says he can contain it.

Now that the economy appears to be gaining steam of its own, the time to shift from stoking inflation to containing it may be sooner than many people now expect.