Resilient US economy on road to recovery

The US economy appears to be bucking the headwinds from Washington, buoyed by healthy business activity and resilient consumers.

The US economy appears to be bucking the headwinds from Washington, buoyed by healthy business activity and resilient consumers.

The latest evidence was a better-than-expected report on industrial production on Friday, led by a jump in the car sector. It follows bullish indicators earlier last week, including a drop in new unemployment claims and strong retail sales.

The data has surprised economists such as Ethan Harris, of Bank of America Merrill Lynch, who revised upwards the company's prediction for growth in the first quarter to 3 per cent from an earlier estimate of 2 per cent.

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 rose 0.7 per cent last month, the biggest gain in three months. Economists had been expecting a 0.4 per cent rise. Factory production and hiring are being bolstered by a rebound in China, which is driving output and exports among many corporations, said Pantheon Macroeconomic Advisors' Ian Shepherdson.

The Chinese economy slowed during the northern hemisphere summer and autumn but has regained momentum in recent months. However, there are still reasons to be cautious, particularly in the US's spring and early summer, when the combined force of Washington's fiscal restraint is expected to have its biggest impact.

Petrol prices have also been rising. Higher petrol prices helped lift consumer prices by 0.7 per cent last month, although the less volatile core reading that is closely followed by the Fed was up just 0.2 per cent, according to other data released on Friday by the US Labour Department.

The jump in payroll taxes and petrol prices was squeezing lower-income consumers in particular, said ITG economist Steve Blitz. Big-ticket items such as homes and cars continue to sell well, but otherwise strong retail sales data out last week showed that spending at restaurants declined for the second month in a row.

Consumer confidence is also shaky. The preliminary Thomson Reuters/University of Michigan reading for March showed an unexpected drop Friday, to 71.8, from 77.6 last month, its lowest level since December 2011.

But so far consumers have not markedly changed their spending habits; retail sales data was better than had been expected. The improved retail spending overall was the "clincher" in Mr Harris's decision to raise his growth forecast.

Nigel Gault, chief US economist at IHS Global Insight, said consumers' wariness 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."

Mr Gault said the most important factor underlying the economy's recent strength was an improving housing sector. Not only did consumers feel more confident about spending when home values were rising, he said, but growth in the housing sector also resulted in greater demand for goods such as furniture 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 retail sales report.

Despite the more robust indicators, the Fed is expected to maintain its efforts to keep interest rates low and pump tens of billions of dollars into the economy each month - a policy known as quantitative easing. Fed officials have said they would not consider a shift in policy as long as unemployment was above 6.5 per cent.

While unemployment has come down from its recent high of 10 per cent, economists say the Fed's easy money policy has been integral to keeping the economy moving.