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A motorist pumps gas at an Exxon station. (Don Ryan/AP Photo)
A motorist pumps gas at an Exxon station. (Don Ryan/AP Photo)

Factories leading the charge for U.S. growth Add to ...

The U.S. economy is shifting from recovery mode to an entrenched expansion, albeit a modest one.

A barrage of indicators show the economy is finding its feet, as factory-led growth begins to reverse the country's elevated jobless rate, leaving companies confident enough to raise prices to offset some of their own surging input costs.

Manufacturing in the area around Philadelphia, the sixth-largest U.S. city, increased at the fastest pace since 1984 in March, led by a surge in new orders; total U.S. factory production was 1.3 per cent higher in February than in December; and the four-week moving average of new claims for unemployment benefits fell to 386,250 last week, the lowest since July, 2008.

All that data, released Thursday, support the Federal Reserve's contention earlier this week that the economy finally is on "firmer footing" - 14 months after the recession officially ended in June, 2009.

With economic growth comes something Fed officials haven't had to worry about for a long time: inflation. The consumer price index, which compiles a broad range of prices to gauge the cost of living, climbed to 2.1 per cent in February from a year earlier, compared with a 1.6-per-cent annual gain in January, the Labour Department reported.

Most of the upward pressure on inflation came from surging food and oil prices, which consumers feel immediately at checkout counters and fuel pumps. But there was some evidence that higher commodity prices are affecting the price of other consumer goods, suggesting producers are passing on at least some of their higher costs.

The annual core inflation rate, which subtracts food and energy prices from the CPI index, increased to 1.1 per cent in February from 1 per cent in January - still tame, but a bit hotter than most Wall Street analysts were expecting.

Taken together, the reports reinforce the view that the Fed will complete its $600-billion (U.S.) asset-purchase program on schedule in June. Prices are rising, but not yet fast enough to concern policy makers who only a few months ago were worried about deflation. With the unemployment rate still well above the Fed's target, the central bank will keep borrowing costs low for some time to come.

But the recovery appears to be entrenched, eliminating any notion that the world's largest economy might slide back toward recession.

"I consider it an expansion," said Andrew Tilton, an economist at Goldman Sachs Group Inc. in New York. "Manufacturing is expanding vigorously. Inflation is no longer trending downward."

Significant weak spots remain. A report on Wednesday showed housing starts declined the most in 27 years in February, while permits issued by municipalities for future construction dropped to the lowest on record. The moribund real estate market is hobbling the construction industry, which is typically a significant source of jobs and demand.

The weakness in housing is also putting upward pressure on inflation: The cost of rent was 0.6 per cent higher than a year ago, suggesting increased demand for rental units over buying a new home.

Factories are benefiting from a lower U.S. dollar, which is making their goods more competitive in booming markets in Asia and Latin America. FedEx Corp., which transports goods equivalent to about 5 per cent of U.S. gross domestic product, reported Thursday that its average daily volume increased 2.4 per cent from a year earlier to 1.22 million boxes in the quarter ended Feb. 28, the most in any fiscal third quarter since 2006. Memphis-based FedEx, the U.S.'s second-biggest package shipping company, predicted "continued moderate growth in the global economy."

Mr. Tilton said he thinks the U.S. economy will expand 4 per cent between now and the second quarter of 2012, a pace that most economists say is just barely fast enough to reduce the unemployment rate, which sits at 8.9 per cent, considerably higher than the Fed's unofficial target of about 5.5 per cent.

Economies typically grow more quickly after recessions. That explains why the Fed opted this week to leave its policy unchanged despite growing inflation pressures. Even as it reported that manufacturing was stronger in February, the Fed said U.S. industry was operating at only 76.3 per cent of its productive capacity, compared with an average between 1972 and 2010 of 80.5 per cent. This suggests that demand isn't yet putting upward pressure on inflation.

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