WASHINGTON (MNI) – The following is the text of the Federal
Reserve’s Beige Book survey Seventh District summary, published
Wednesday:

SEVENTH DISTRICT-CHICAGO

Summary.

Economic activity in the Seventh District continued to improve, but
the rate of improvement slowed from April to May. Manufacturing
continued to lead the way, and consumer and business spending also
increased further. Construction activity improved slightly on the basis
of increases in residential and public building. However, the gains in
all of these sectors in May were somewhat slower than in April. Price
pressures remained limited. Crop conditions were slightly better than
normal for this time of year.

Consumer spending.

Consumer spending increased in April and May. Though contacts noted
smaller gains than during the previous reporting period, they attributed
most of the slowdown to the early Easter holiday drawing sales into
March. Noticeable increases were seen in the home improvement and lawn
and garden categories as consumers prepared for summer. Auto sales also
continued to rise as buyers returned to showrooms to take advantage of
favorable price and credit terms. In addition, the pace of tourism
activity increased with warmer weather and lower hotel rates boosting
demand. Retail contacts indicated that recent increases in income should
translate into higher sales with the momentum carrying forward into the
fall season.

Business spending.

The rise in business spending moderated from the previous reporting
period. Inventory investment slowed. Contacts expect that manufacturers
will do only marginal restocking in the remainder of 2010, while
retailers will rebuild inventories at least through fall. Labor market
conditions improved. Contacts noted increasing signs that employment
gains could be stronger in the second half of 2010. For example, they
are seeing more job advertisements in categories associated with
companies that are expanding employment. By sector, manufacturers
continued to hire to fill skill-based needs and make use of previously
idle capacity; and a large staffing firm reported billable hours rose in
large part due to increasingly higher demand for industrial workers.
Labor demand in professional and business services and retail trade also
increased. Unemployment in the District remained above the national
rate, with the average duration increasing. However, a contact noted
that recently unemployed workers were re-entering the labor force more
quickly than the previously unemployed.

Construction/real estate.

Construction activity improved slightly from the previous reporting
period. Residential building benefitted to some degree from the
homebuyer tax credit that expired in April, but contacts noted that
activity pulled back in May. They expect construction in 2010 as a whole
to be just slightly better than in 2009. New residential development
remained minimal. Contacts indicated tight credit combined with the
overhang of existing unimproved and distressed lots are likely to deter
development for an extended period. Single-family home prices held
steady, but downward pricing pressure continued to be strong for
condominiums. Private nonresidential construction remained weak, as the
elevated inventory of vacant industrial and retail properties continued
to hold back demand for new construction. Public construction, however,
increased with contacts noting more activity in highway, education, and
medical projects.

Manufacturing.

Manufacturing activity was strong in April led by the automotive,
energy, medical, and consumer goods industries, but the rise in
production softened some in May. With sales holding up in recent months,
a contact in the auto industry indicated that production was running at
a steady pace. Capacity utilization in the steel industry leveled off,
and a contact indicated that it was likely to stay around its current
level for the next 3-to-4 months as the pace of inventory replenishment
slows. For example, more manufacturers of industrial metals noted that
they were buying only what material they could immediately manufacture
and sell. In contrast, demand for heavy equipment was indicated to be
finally turning a corner; dealers were rebuilding inventories and have
seen a significant increase in demand for rent-to-sell fleets. Mining
and agricultural equipment sales remained stronger than for construction
equipment. Contacts indicated that the pipeline for the export of
capital equipment abroad, particularly to Asia and South America,
remains robust. The increase in residential construction in April led to
an increase in activity for housing-related manufacturers with shipments
of wallboard in the District up slightly as a result.

Banking/finance.

Credit conditions improved, on balance, in April and May.
Volatility increased across financial markets, and short-term lending
and corporate credit spreads widened due in part to the uncertainty
surrounding Europes fiscal crisis. However, a contact noted that the
financial system now has “more cushion” to absorb the higher cost of
credit given the ongoing improvement in U.S. economic conditions. In a
sign of this effect, banking contacts again reported better loan
quality. Lending, particularly among large banks, increased with loan
demand firming and terms and standards beginning to open up a bit.
Residential real estate financing improved with secondary market
appetite for jumbo and ARM mortgages beginning to return along with
greater availability of private mortgage insurance. Bank lending
remained more limited for commercial estate. However, private equity
appetite for multifamily properties continued to be strong, and a
contact noted that real estate investment by European and Asian
investors was also on the rise.

Prices/costs.

Price pressures were limited in April and May. Cost pressures from
earlier increases in steel and energy prices were reported by several
contacts, although the prices of both have decreased recently. Contacts
noted that pressures from rising commodity prices were just starting to
be noticeable and that the volatility of commodity prices was a greater
concern. Wage pressures increased only modestly from the previous
reporting period. Pass-through of cost pressures to downstream prices
remained minimal, with pricing power in most industries continuing to be
weak.

Agriculture.

Crop conditions in the District were slightly better than normal
for this time of year. Planting progress far exceeded that of a year ago
with the exception of the southern portion of Iowa where heavy
precipitation slowed field work. The emergence of corn plants was far
ahead of average across most of the District, while soybean plant
emergence was about typical. Rains were timely for the most part, but a
period of cooler weather slowed crop development until hot and sunny
weather gave a needed burst of energy to young plants in May. Corn and
soybean prices remained in the same range as the prior reporting period,
while wheat prices rose. Cattle and hog prices continued to rebound from
last years lows, as animal numbers were constrained. Milk prices
stabilized after declines, remaining below break-even levels.

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

[TOPICS: M$$CR$,M$U$$$,MMUFE$,MGU$$$,MFU$$$]