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

SEVENTH DISTRICTCHICAGO

Summary.

The pace of economic activity in the Seventh District moderated in
July and August. Nonetheless, contacts remained cautiously optimistic
that it would strengthen again as we near the end of the year.
Manufacturing production growth slowed and private construction
decreased, while consumer spending increased and business spending
continued at a steady pace. Credit conditions improved slightly. Price
and wage pressures were limited, while agricultural prices moved higher.

Consumer spending.

Consumer spending increased from the previous reporting period.
Retail sales excluding autos were up in August influenced by state sales
tax holidays and heavy discounting on back-to-school items like
clothing. Contacts noted that higher and lower-end retailers fared well,
with middle-end retailers continuing to see customers trading down to
lower priced alternatives. Auto sales rose in July as increased
incentives spurred demand, but sales leveled off in August. Dealers
continued to report that inventories were lower than desired,
particularly for the most popular Ford, GM, and Chrysler models. In
addition, warmer weather in late summer boosted travel and tourism
activity in the District.

Business spending.

Business spending continued at a steady pace in July and August.
Inventory rebuilding was less widespread than earlier in the year, but
was ongoing in several industries. Capital spending plans were largely
unchanged, although merger and acquisition activity was reported to have
picked up in manufacturing. The pace of hiring moderated, but
manufacturing, information technology, and healthcare were exceptions to
this trend. Contacts indicated that firms were increasingly engaging in
replacement hiring for entry-level positions as they promote from within
to address mid-level turnover. Demand for temporary and contract labor,
while a bit weaker than during the previous reporting period, remained
strong. Several contacts also noted a mismatch between the skills of the
large number of unemployed workers and the types of available jobs.

Construction/real estate.

Construction activity decreased from the previous reporting period.
Residential building remained minimal despite the fact that unsold
inventory has fallen considerably in recent months. Both new and
existing home sales declined, with foreclosed homes coming onto the
market at a heightened pace. A contact noted that downward pressure on
new home prices had likely bottomed out due to the fact that builders
were refraining from reducing prices below costs, as many had done
earlier in the year. Refinancing activity picked up as mortgage rates
moved lower, but contacts continued to report that new mortgage credit
remained tight for many borrowers. Private nonresidential construction
was again constrained by elevated vacancies and declining commercial
rents. Contacts also noted, however, an increase in inquiries and
redevelopment projects of vacant commercial space. In contrast, public
construction increased with activity concentrated in transportation
infrastructure and healthcare-related projects.

Manufacturing.

Manufacturing production growth slowed from the previous reporting
period. Contacts indicated it was difficult to gauge the extent of the
recent softening as July and August, in general, tend to be slower. In a
positive sign, several metals manufacturers indicated that orders and
inquiries had begun to firm in recent weeks. Manufacturers of
construction materials and household goods reported declines in
shipments, with the exception of household appliances where inventory
continued to be rebuilt in the aftermath of the recent rebate programs.
The transportation industry remained a source of growth with auto and
heavy truck production holding steady. Demand for heavy equipment
increased considerably as rental companies rebuild inventories following
greater than expected demand this past spring. Export activity was also
robust, with heavy machinery and autos leading the way. Demand from
developing economies in Asia and South America continued to be strong,
but contacts also noted that demand from Europe had improved
considerably in recent months.

Banking/finance.

Credit conditions improved slightly from the previous reporting
period. Corporate credit spreads edged lower and business loan demand
was steady, driven mostly by refinancing and acquisition activity. On
the other hand, demand for liquidity remained high with greater
uncertainty over the economic outlook, regulation, and the political
landscape restraining the supply of credit. Contacts indicated, however,
that demand for distressed commercial properties continued to be strong.
Banking contacts again noted that fierce competition was leading to
greater flexibility in pricing and terms and greater availability of
business loans. Consumer loan availability also increased, particularly
for auto loans and credit cards. Bank loan quality continued to slowly
improve, and lower loan loss provisions contributed to higher bank
earnings.

Prices/costs.

Price and wage pressures continued to be small in July and August.
Pricing power and pass-through of cost pressures to downstream prices
were limited. Commodity prices firmed, but only a few contacts reported
significant increases in material costs. Similar to the previous
reporting period, wage pressures increased only modestly. However,
several contacts expressed concern over the prospect of rising
healthcare costs in the coming year.

Agriculture.

Crop conditions were better than a year ago in much of the
District. Corn and soybean crops continued to develop ahead of last
years pace, setting the stage for an early autumn harvest. However,
alternating periods of excess precipitation and intense heat sapped the
potential for record yields in many areas, and the incidence of diseased
soybeans increased in Iowa. Preliminary yield reports were lower than
anticipated, but the harvest was still expected to be a good one. A
rally in corn and soybean prices during the reporting period prompted
additional selling ahead of crop deliveries. Stocks were adequate to
meet demand, but some poor quality corn required blending before it
could be sold. Revenues in the livestock sector improved as dairy, hog,
and cattle prices increased. In addition, a major recall of eggs
produced in Iowa lowered supplies.

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

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