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    On the Rebound: Robust Overseas Demand Triggers Rise in US Industrial Production

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    US factory output is outpacing previous expectations due to solid demand at home and abroad, suggesting GDP projections remain in line with the expectations of a sustained 3-percent growth this year.

    Kristian Rouz - US industrial output has exceeded previous estimates in February, according to a report from the Federal Reserve, reflecting the near-term weakness of the dollar and a pickup in global economic expansion.

    The data points to higher US exports, which is expected to narrow the trade deficit, while metals tariffs and ongoing NAFTA negotiations are set to put economic expansion back on track.

    US factory production rose 1.2 percent last month, surpassing the previous estimates of a 0.5-percent expansion. The figure comes after industrial output shrunk 0.2 percent in January. The US central bank is now expecting acceleration in overall GDP for this quarter, albeit there are complications in the form of slower construction activity.

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    Total factory output, including mining and utilities, increased 1.1 percent, the report showed, compared to previous estimates of 0.4 percent. Meanwhile, total industrial capacity in the country rose to 78.1 percent, as US manufacturers ramped up their hiring due to the tax cuts enacted in December.

    "Much of manufacturing is a user of steel and aluminium," John Ryding of New York-based RDQ Economics said. "The policy to impose tariffs poses potential risks to the broader output gain given how important trade is to manufacturing."

    This comes as the government moved to slap trade restrictions on the imports of industrial metals, stirring the expectations of a sharp rise in factory-gate prices on domestic steel and aluminum production. Subsequently, US steel mills and aluminum plants - expecting a rise in revenues - increased their output.

    Additionally, higher factory-gate price expectations are also projected to boost US imports - along with the domestic mining - of iron ore and bauxites.

    The economy is now forecast to run full-steam, with capacity utilization likely surpassing the psychological threshold of 80 percent, meaning many idle Rust Belt facilities will resume their operation, creating more industrial jobs in the Northeast and Midwest.

    However, the tight labor market may hold back the rapid reindustrialization of traditional US manufacturing regions. With unemployment holding at 4.1 percent, many employers have struggled to lure in workers, spurring modest wage inflation.

    Additionally, the current US immigration system is not expected to bring in a substantial number of qualified manufacturing workers from overseas, as illegal arrivals and family reunifications still dominate the immigration pattern.

    The Federal Reserve has acknowledged the challenge of worker shortages, but the central bankers have reassured the public that the situation is in under control.

    "While the aggregate labor market appears to be modestly tight at the moment, not all individuals have benefited equally from these developments," the Fed's Yearly Monetary Policy report found.

    Central bankers have pointed out US labor participation is still low at just below 65 percent, suggesting there is underutilized labor capacity at home. Still, the Fed said, employers will have to boost wages in order to fill the available vacancies.

    Several separate reports from private-sector enterprises have suggested US factory output expanded last month at its fastest pace since May 2004.

    However, the expansion was uneven. Utility output, for example, dropped 4.7 percent after actually rising 1.3 percent in January - when overall factory production declined. This comes amidst warmer weather conditions, and due to the increasing number of households - especially outside major metropolitan areas - getting off the grid by installing solar panels and drilling their own water wells.

    US mining rose 4.3 percent as higher oil prices encouraged oil and gas drilling. Machinery production increased 0.5 percent, reflecting strong demand overseas, whilst car production increased 3.9 percent. However, consumer goods production rose only 0.1 percent, as the US remains reliant on imports of more affordable consumer goods from East Asia.

    Overall, the Fed said, GDP growth projections remain in line with a broader trend to a robust acceleration. However, quarterly data is set to bring more clarity, and as of now the central bank is expected to raise interest rates three or four times this year, suggesting a gradual pivot to the supply-side in the US economy. 

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