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

Summary

Economic activity in the Seventh District continued to expand at a
moderate pace in late February and March. Growth in consumer spending
picked up, and business spending continued to increase. The pace of
growth in manufacturing production was little changed and construction
activity increased. Credit conditions improved slightly. Energy prices
increased, but with limited pass-through to downstream prices, and wage
increases remained moderate. Soybean and cattle prices rose, while corn,
wheat, milk, and hog prices decreased.

Consumer spending

Consumer spending increased significantly in late February and
March. Retailers reported unseasonably warm temperatures boosted retail
sales. Because of the earlier-than-normal start to the spring shopping
season, inventories of some lawn & garden, home improvement, and leisure
items ended the reporting period on the lean side. Several contacts
thought that the recent gains in consumer spending might dissipate over
the medium-term, pointing to the temporary nature of the boost from
warmer weather and concerns about the impact of higher gasoline prices
on consumer budgets. Auto sales increased, with contacts noting improved
availability of financing for prospective buyers with below-prime credit
ratings. Dealerships continued to report some difficulty in stocking
popular models because of supply-chain constraints.

Business spending Business spending continued to increase in late
February and March. Contacts reported that inventories were generally at
comfortable levels, with the exceptions in auto and consumer goods noted
above. Capital spending increased steadily. Purchases of heavy equipment
picked up, led by robust activity in the energy sector. An exception was
the coal mining industry which a contact noted was being negatively
impacted by mild weather and the cheaper extraction costs for natural
gas. Several manufacturers reported spending for technological upgrades
as well as moving ahead with planned increases in capacity. Contacts
also noted a pick-up in building renovation and increased spending on
marketing and for labor force training. Labor market conditions
continued to improve. Hiring increased, although it remained selective
in many industries. Manufacturing contacts continued to report
difficulty in attracting job applicants with ideal skill sets, and in
some cases have reduced experience requirements or increased salaries to
fill open positions. A staffing firm reported an increase in demand for
light industrial, office and clerical, and IT and engineering positions.
However, gains in these areas were being offset by declines in others,
so that on net temporary employment was little changed.

Construction/real estate

Construction activity increased in late February and March. Demand
continued to be strong for multi-family construction, particularly
apartments. That said, a few contacts questioned whether current
apartment building plans would lead to overbuilding in this segment.
Overall, residential real estate conditions improved slightly.
Single-family construction was up some from its depressed levels, as
large homebuilders have seen a solid increase in sales in the last three
months. Realtors noted some increase in activity in the market for
existing homes, although many buyers are still waiting for prices to
come down further. Foreclosures continued to put downward pressure on
prices. Nonresidential construction also increased. Contacts noted a
pick-up in industrial, healthcare and infrastructure building activity.
Commercial real estate conditions were mixed by segment. Vacancy rates
decreased for office and industrial properties, but contacts indicated
that excess retail space continues to exist, especially big box stores
and strip center/mall space. Commercial rents were flat, as was the
available sublease space on the market.

Manufacturing After a strong start to the year, growth in
manufacturing production leveled off in late February and March. With an
increase in quoting activity and deepening order books, contacts
remained cautiously optimistic that growth would pick up again in the
coming quarters. The auto industry continued to be a source of strength.
Automakers expected sales to continue to increase over the year, but
voiced concern that it would be challenging for production to rise much
further above what is already planned given the capacity constraints
faced by their suppliers. Confirming this production limit, several auto
suppliers reported that they have already been asked by their customers
to increase capacity. Capacity utilization in the steel industry was
steady, but an industry contact expected to see some acceleration in
production in the near term. Demand for heavy equipment was boosted by
the need to replace ageing equipment. Exporters continued to benefit
from advantageous terms of trade; and despite some softening in demand
from Western Europe, again reported robust orders from Asia and Latin
America.

Banking/finance

Credit conditions were slightly improved from the prior reporting
period. Volatility and risk premia edged lower and concerns about
European sovereign debt continued to subside. Several contacts noted an
increase in risk appetite, pointing to higher demand for equities and
real estate. Banking contacts indicated that business loan growth
remained moderate, with their larger corporate clients continuing to
cite policy uncertainty as a reason for caution in borrowing. In
contrast, consumer loan growth picked up, with credit card usage
increasing. Credit availability for households improved, particularly
for auto loans and credit cards, where greater competition was leading
to more favorable terms for borrowers. However, credit conditions
remained tight for homebuilders and small businesses.

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** MNI Washington Bureau: 202-371-2121 **

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