After being hit by the Covid-19 pandemic, the United States economy began to recover. Seen from the US factory activity rose for the third month in a row in March, supported by a sharp rebound in auto production. This increase signals the decline in automotive industry production over the past year may have passed.
Citing Reuters, Federal Reserve data said overall industrial production rose 0.9% in March. Economists polled by Reuters had expected factory output to increase 0.4%. Output jumped 5.5% from a year earlier.
Manufacturing, which accounts for 11.9% of the American economy, has benefited from the shift in spending to goods from services during the Covid-19 pandemic. But manufacturers have struggled to cope with strong demand while the labor market has become extremely tight and supply bottlenecks persist due to the Covid lockdown in China and the war in Ukraine.
Hardest hit by supply problems is the auto sector, where production has been hampered for more than a year by a global shortage of electronic components, particularly the computer chips needed for today's increasingly complex vehicle operating systems.
But U.S. production of motor vehicles and parts jumped 7.8% last month, the biggest gain since October, after being revised down 4.6% in February. Total car and light truck assembly rose to nearly 9.5 million vehicles at a seasonally adjusted annual rate, the highest since January 2021, up from 8.3 million in the previous month.
Along with that, US Federal Reserve Chair Jerome Powell has also signaled a 50 basis point (bps) rate hike at the Fed's next May 3-4 meeting. The move is to curb the US's hottest inflation since 1981.
Federal Reserve Bank of New York President John Williams said an interest rate hike was a reasonable option for the Fed's decision at its May meeting. As for the minutes of their March meeting, most bankers agreed and were cautious about raising 25 bps due to uncertainty surrounding Russia's invasion of Ukraine.
Brainard also said that price fixing in financial markets showed investors had gotten the message that central bank officials would move quickly to raise interest rates. Interest rate futures imply at least another 200 bps in the Fed's key policy rate tightening from its current target range of 0.25% to 0.5%.
Bill Adams, Comerica Bank's chief economist, said the auto industry had recovered. Production plummeted in 2021 as a shortage of chips left factories unemployed. Now that's reversed as automakers work through the challenges and find ways to expand their chip supply.
He said a further production recovery would boost car sales that were held back by supply shortages, Adams said. Even as consumer spending shifts back to services in the months ahead as the Covid caseload dwindles. Then, vehicle sales have a brighter prospect this year than other durable consumer goods categories.
"Since last year's sales were hampered so much by chip shortages, vehicle sales are constrained more by supply than demand, and will grow strongly in 2022 and 2023 despite higher auto loan (interest) rates and less support from fiscal stimulus," he said.
The industrial sector's overall capacity utilization, a measure of how fully companies use their resources, rose to 78.3% last month, the highest in more than three years, from 77.7% the previous month. This is 1.2 percentage points below the 1972-2021 average.
Capacity utilization for the manufacturing sector increased to 78.7% in March, the highest level since 2007, from 78.1% in February. Officials at the Fed tend to look to measures of capacity usage to signal how much "slack" is left in the economy - how far growth has room to go before it becomes inflationary.
A separate report from the New York Federal Reserve on Friday showed manufacturing activity in New York state had picked up in April, even as inflationary pressures continued to build. The Empire State Manufacturing Index rose to a four-month high of 24.6 after a negative reading of 11.8 in March. The survey's paid price index shot to a record high of 86.4 from 73.8 last month.
Optimism in the outlook waned, however, with the six-month outlook index dropping to 15.2, the lowest in about two years, from 36.6 in March.
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