The latest evidence came on Friday with a better-than-expected report on industrial production, led by a jump in the automobile sector. It follows bullish indicators earlier in the week, including a drop in new unemployment claims and strong retail sales.
The data has surprised economists like Ethan Harris of Bank of America Merrill Lynch, who on Friday revised upward the company’s prediction for growth in the first quarter to 3 percent from an earlier estimate of 2 percent.
Many experts had been looking for more of a drag from the restoration of full Social Security taxes in January and the automatic, across-the-board cuts in federal spending that began March 1, a process known as sequestration.
“It feels like the economy has some momentum and is in a little bit better shape to handle the sequester,” Mr. Harris said. While higher taxes and lower federal spending are a “speed bump,” he said, “the economy has better shock absorbers.”
Industrial production jumped 0.7 percent in February, the biggest gain in three months, the Federal Reserve said. Economists had been expecting a 0.4 percent rise.
Factory production and hiring are being bolstered in part by a rebound in China, which is driving output and exports among many major corporations, said Ian Shepherdson, chief economist for Pantheon Macroeconomic Advisors.
The Chinese economy, the world’s second-largest, slowed last summer and fall but regained momentum in recent months. To be sure, there are still reasons to be cautious, particularly in spring and early summer, when the combined force of Washington’s fiscal restraint is expected to have its biggest impact.
Gasoline prices have also been rising. Higher gas prices helped lift consumer prices by 0.7 percent in February, although the less volatile core reading that is closely followed by the Fed was up just 0.2 percent, according to other data released Friday by the Labor Department.
The jump in payroll taxes and gas prices is squeezing lower-income consumers in particular, said Steve Blitz, chief economist at ITG.
Big-ticket items like homes and cars continue to sell well, but otherwise-strong retail sales data out earlier this week showed that spending at restaurants declined for the second month in a row.
“People who can’t afford it aren’t going out as much to eat,” Mr. Blitz said.
Consumer confidence is also shaky. The preliminary Thomson Reuters/University of Michigan reading for March showed an unexpected drop Friday, dropping to 71.8, from 77.6 in February, its lowest level since December 2011. But so far consumers have not markedly changed their spending habits; retail sales data on Wednesday was better than had been expected.
The improved retail spending over all was the “clincher” in Mr. Harris’s decision to raise his forecast for growth.
Nigel Gault, chief United States economist at IHS Global Insight, said that the wariness of consumers in the new survey “may simply be a vote of no confidence in the government and the problems in Washington. It may not be represented in what consumers do.”
According to Mr. Gault, the most important factor underlying the economy’s recent strength is an improving housing sector — a trend that may be further confirmed next week when Februrary statistics are released on housing starts and home sales.
Not only do consumers feel more confident about spending when home values are rising, Mr. Gault said, but growth in the housing sector also results in greater demand for goods like furniture, carpeting and other furnishings.
There are suggestions of that kind of trickle-down in other recent economic reports. Of the 236,000 jobs the government reported as being created in February, 48,000 were in the construction sector. Similarly, building supplies were among the strongest components in the most recent report on retail sales.
“Housing helps everything,” said Mr. Gault, who also lifted his estimates for growth in the first quarter.
Like Mr. Harris and several other economic forecasters, he also foresees a temporary slowdown in the second quarter when the worst fallout from the sequester and the higher taxes is expected to show up in the economy’s Geiger counters.
Despite the more robust indicators in recent weeks, the Fed is expected to maintain its efforts to keep interest rates ultralow and pump tens of billions of dollars into the economy each month, a policy known as quantitative easing. The majority of Fed officials have said they would not consider a shift in policy as long as unemployment was above 6.5 percent. Fed policy makers are to meet Tuesday and Wednesday.
While unemployment has come down slowly from its recent high of 10 percent, economists say the Fed’s easy money policy has been integral to keeping the economy moving, as well as lifting the stock market to new highs. The Fed is pumping $85 billion into the financial system each month — about what the sequester will drain from the economy between now and Sept. 30, said Maury Harris, chief United States economist at UBS.
The money created by the Fed’s policies is slowly filtering its way through the economy as banks ease lending standards and increase some lines of credit.
“It’s not as quick as everyone hoped, but the money is being deployed,” said Mr. Harris. “It has a lot of knock-on effects.”
Article source: http://www.nytimes.com/2013/03/16/business/economy/consumer-inflation-jumps.html?partner=rss&emc=rss
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