Fed survey finds modest gains in the U.S. economy in February

A Federal Reserve survey of business conditions across the United States has found that economic activity was expanding at a modest pace in February.

The Fed survey released Wednesday shows that the central bank’s business contacts were expressing optimism last month about a stronger rebound as more COVID-19 vaccines are distributed.

Reports on consumer spending and auto sales were mixed, while overall manufacturing showed moderate gains despite supply-side constraints, according to the Fed survey.

The report, known as the beige book, is based on surveys conducted by the Fed’s 12 regional banks. It will form the basis for discussions when central bank officials meet on March 16-17 to mull their future moves on monetary policy.

The expectation is that the Fed will keep its benchmark short-term rate at a record low of zero to 0.25%. The central bank is also expected to again signal that rates will not rise for the foreseeable future and the current pace of $120 billion per month in bond purchases will also continue.

Most of the Fed’s 12 regions reported the economy was growing in February at a modest pace although the Dallas region said activity had been disrupted by a severe winter storm that knocked out electricity to millions of residents for a time.

“Unprecedented winter storms and widespread power outages in mid-February severely disrupted economic activity, although the impact is mostly expected to be transitory,” the Fed’s Dallas regional bank reported.

The New York Fed was one of the few regions that reported a decline in activity last month, pointing to “particular weakness” in the service sector.

The beige book survey found that demand for labor varied considerably by industry and skill levels. Many businesses noted continued difficulties in attracting and retaining qualified workers, with lack of child care and a variety of other constraints still being imposed by the pandemic.

“Wage increases for many districts are expected to persist or to pick up somewhat over the next several months,” the report said.

Overall manufacturing activity in most districts showed modest increases despite challenges from supply-chain disruptions.

Input costs rose modestly last month but with higher price increases seen for steel and lumber, the report said.

“In many districts, the rise in costs was widely attributed to supply chain disruptions and to strong overall demand,” the beige book said, noting that transportation costs had been rising due to increases in energy costs.

Gus Faucher, chief economist at PNC Financial Services Group, said that the beige book findings were in line with his own economic forecast that expects moderate GDP growth in the current quarter but an acceleration for the rest of the year.

“Businesses are expecting demand to pick up in the spring and beyond as vaccine distribution continues, better weather allows for more outdoor activity and stimulus efforts support consumer spending,” Faucher said.