WASHINGTON (MNI) – The following is the Beige Book section on the
Federal Reserve’s Seventh District, published Wednesday:

SEVENTH DISTRICT – CHICAGO

Summary

Economic activity in the Seventh District increased at a slightly
faster pace this reporting period. Retail and manufacturing contacts
were more optimistic about the outlook for the rest of the year and
early 2011, while construction and financial contacts remained cautious
in their assessment. Consumer spending rose moderately, and business
spending continued to increase at a steady pace. Manufacturing
production also increased, while construction was limited outside of
highway and bridge work. Credit conditions were slightly improved. Cost
pressures rose, but there was limited pass-through to downstream prices.
Wage pressures remained moderate.

Consumer spending

Consumer spending was up moderately from the previous reporting
period. Retail sales excluding autos increased in October and early
November. Consumers continued to spend mostly on essentials, but
contacts noted that discretionary and impulse spending were returning
slowly. The best selling items again were those most heavily promoted
and discounted like apparel, electronics, appliances, and home
improvement goods. Retailers also noted greater optimism for the holiday
shopping season, with several reporting that they recently had made
later-than-usual orders of big-ticket items in anticipation of Black
Friday. Auto sales also rose, aided by increased incentives. Auto
dealers indicated that inventory had returned to more comfortable
levels, although a few again cited a limited supply of stronger selling
models.

Business spending

Business spending continued to increase at a steady pace from the
previous reporting period. Capital spending on equipment and structures
was little changed. Inventory rebuilding in manufacturing leveled off.
However, heavy machinery rental fleets continued to expand, and
higher-than-expected fall sales prompted retailers to expand inventories
in advance of the holiday shopping season. Hiring was again mostly
limited to manufacturers bringing on temporary workers. In contrast, a
few manufacturing contacts also reported contemplating increasing the
number of work shifts, a decision which would require hiring additional
permanent employees. In addition, a staffing firm reported a modest
increase in industrial temporary-to-permanent transitions. Outside of
manufacturing, hiring in information technology, engineering, and
healthcare remained strong; seasonal hiring in retail trade was greater
than the prior year; and there was a small increase in demand for
temporary office and clerical workers.

Construction/real estate

Construction activity was limited in October and early November.
Elevated levels of unsold homes continued to be a drag on new
residential construction and home prices. Home builders reported only a
modest improvement in sales, with showroom traffic weak but conversion
rates increasing. The availability of mortgage financing, particularly
for condominiums, remained a constraint for homebuyers, although lower
mortgage rates led to an increase in refinancing. Residential
development of new properties was minimal, as builders were instead
concentrating their work on existing distressed properties. Private
nonresidential construction was again subdued, although contacts
reported a small increase in industrial projects. Public construction,
driven by highway and bridge work, remained strong.

Manufacturing

Manufacturing production continued to improve through October and
early November. Contacts generally expressed a very positive outlook for
manufacturing, pointing to recent indications of demand firming into
early 2011. The fabricated metals, automotive, and heavy equipment
sectors were again strong sources of growth in manufacturing. Steel
production softened recently, but contacts noted that service center
inventories remain lean and that order inquiries for January delivery
had accelerated in recent weeks. Orders were also reported to be on the
rise for metal fabricators in the automotive, oil and gas, and aerospace
industries. Contacts in the automotive industry were relatively upbeat,
expecting auto sales to continue to strengthen into 2011 with the retail
segment gaining momentum. Freight tonnage and new orders for heavy
trucks increased, with strong demand expected next year to replace an
aging fleet. Heavy equipment manufacturers reported continued strength
in the demand for earth-moving equipment abroad and a recent increase in
domestic activity. In contrast, activity was mixed for manufacturers
with ties to residential housing. Shipments of construction materials
decreased, while shipments of appliances increased in advance of Black
Friday promotions.

Banking/finance

Credit conditions improved from the previous reporting period.
Fierce competition for high-quality borrowers was indicated to be
leading to aggressive terms and structures for business credit, although
core business loan demand remained weak. In contrast, banking contacts
reported an increase in demand for refinancing, merger and acquisition
lending, and in agribusiness for working capital. Commercial real estate
credit conditions were slightly improved, with CMBS issuance increasing
and bank lending for distressed property investment edging up. Consumer
lending also picked up a little in October and early November, although
contacts worried that the weak labor market and potential end of
extended unemployment insurance benefits would limit consumer spending
in the coming months. Loan quality improved, increasing bank earnings,
but contacts anticipated only modest asset growth in 2011 as business
and household deleveraging was expected to continue.

Prices/costs

Cost pressures increased from the previous reporting period, but
limited pricing power continued to constrain pass-through to downstream
prices. Manufacturing contacts cited increases in industrial metals
prices like copper, iron ore, and scrap steel; and mill lead times were
also said to be rising. Energy prices were mixed. Oil prices moved up,
but natural gas prices held at low levels with record storage and a
forecast for a warmer-than-normal winter. Retailers also reported
wholesale price increases, but most were accepting lower profit margins
rather than attempting to pass them along to consumers. Wage pressures
again increased only modestly.

Agriculture

Farm earnings were boosted by an early and large harvest. The
District harvest should be the third largest ever for corn and the
second largest for soybeans. Soybean yields set a record for the
District. Corn yields were less than expected in Indiana, Illinois, and
Iowa, but above average in Michigan and Wisconsin. This years corn crop
was of a higher quality. The new corn has been blended with last years
poor quality crop; grain elevators have been able to sell the blended
crop, clearing out storage space. In addition, the low moisture content
of harvested corn plus low natural gas prices have kept drying costs to
a minimum. Dry weather allowed more time for field work compared with a
year ago, and there were reports of shortages of fertilizer and
equipment parts due to earlier-than-usual preparations for next years
crop. Prices for corn, soybeans, milk, hogs, and cattle were all above
the levels of a year ago, particularly so for corn. Even with higher
feed costs, margins for livestock producers remained positive.

** Market News International Washington Bureau: 202-371-2121 **

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