Fed Beige Book: 'Modest' Wage Growth is Broadening

By Jeffrey Sparshott and Sarah Chaney Features Dow Jones Newswires

U.S. industrial production rose in March as the weather cooled and demand for home heating surged, masking a drop in manufacturing activity during the month.

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Industrial production--a measure of output at factories, mines and utilities--climbed 0.5% from a month earlier, the Federal Reserve said Tuesday. Economists surveyed by The Wall Street Journal had expected the index to climb 0.5%. Output for February gained 0.1%.

Capacity use, a measure of slack in the economy, increased 0.4 percentage point to 76.1%. Economists had expected 76.2%. Capacity use remains below the long-run average of 79.9%, a sign the economy is operating below its potential.

Overall industrial production was boosted by an 8.6% jump in output at utilities, the largest rise in the index's history, "as the demand for heating returned to seasonal norms after being suppressed by unusually warm weather in February," the Fed said.

Elsewhere, the report was mixed.

Manufacturing output, the biggest component of industrial production, decreased 0.4% in March, the first decline since August 2016, while gains for January and February were revised down. Motor vehicles and parts were the biggest drag last month.

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U.S. factory activity was stagnant through much of 2016 but picked up a little early this year. March manufacturing output was up 0.8% from the same month a year earlier. Factory output increased at an annual rate of 2.7% in the first quarter, the Fed said.

U.S. businesses have been anticipating stronger demand from domestic consumers. Overseas, economic activity also has brightened, though a stronger dollar could make American goods more expensive for buyers outside the U.S.

The Institute for Supply Management earlier this month said its index of factory activity fell to 57.2 in March from 57.7 in February, which had been the strongest reading since August 2014. Despite the downshift, the gauge marked a seventh consecutive month of industrial growth--a reading above 50 indicates sector expansion.

Tuesday's report showed output in the volatile mining sector rose 0.1% in March. The mining index, which includes oil and natural gas extraction, was up 2.9% from a year earlier. The sector had been weighed down by weak commodity prices but appears to have stabilized.

Utility output surged 8.6% from the prior month and was up 4.6% from a year earlier. Utilities had been a drag on overall industrial production earlier in the year as warm weather capped demand for home heating.

The Federal Reserve's report on industrial production can be found at: https://www.federalreserve.gov/Releases/g17/current/default.htm.

Write to Jeffrey Sparshott at jeffrey.sparshott@wsj.com and Sarah Chaney at sarah.chaney@wsj.com.

WASHINGTON--A tightening labor market is putting broader pressure on wages as U.S. firms increasingly report trouble filling low-skilled jobs, according to a new Federal Reserve report.

In a couple regions, "worker shortages and increased labor costs were restraining growth in some sectors, including manufacturing, transportation and construction," the Fed said Wednesday in a roundup of anecdotal information on regional economic conditions, known as the beige book. The latest report was based on anecdotes covering mid-February through the end of March across the central bank's 12 districts.

The report found that "modest wage increases broadened" and "employers in most districts had more difficulty filling low-skilled positions, although labor demand was stronger for higher skilled workers."

More broadly, the Fed said economic activity expanded across all 12 districts, "with the pace of expansion equally split between modest and moderate."

Inflation continued to firm, with prices reported as rising modestly. "Businesses mostly expected mild to moderate price growth to persist in the next several months," the report said.

Some districts reported uncertainty about the outlook for trade policy under the new Trump administration. The Boston Fed said "a manufacturer of test equipment which exports a significant portion of its production worried about trade deals." The Dallas Fed said "a few manufacturing contacts noted considerable policy uncertainty, especially regarding any changes that would impact trade with Mexico."

A few businesses also raised immigration concerns. The Minneapolis Fed said "firms catering to tourists in the Black Hills region reported difficulty finding labor, especially seasonal immigrant labor they have traditionally used." And in the San Francisco Fed's district, "hotel stays were lower than expected due to changes in immigration policy and increased scrutiny of foreign arrivals," the report said.

The Fed's policy-setting committee is scheduled to hold its next meeting in two weeks, on May 2-3.

The U.S. central bank raised its benchmark short-term interest rate in mid-March, and officials penciled in two more quarter-percentage-point rate increases by the end of 2017. Policy makers also have signaled they might start to shrink the Fed's $4.5 trillion portfolio of mortgage and Treasury securities later this year or in 2018.

Forecasters think the Fed is likely to stay on hold until June or later. Business and academic economists surveyed by The Wall Street Journal this month saw the average probability of a May rate increase at just 14%.

The Fed's latest beige book report can be accessed at: https://www.federalreserve.gov/monetarypolicy/beigebook/

Write to Ben Leubsdorf at ben.leubsdorf@wsj.com and Sarah Chaney at sarah.chaney@wsj.com

(END) Dow Jones Newswires

April 19, 2017 14:15 ET (18:15 GMT)