WASHINGTON (MNI) – The following is the latest Beige Book survey of
economic conditions in the Federal Reserve’s Fourth District,
published Wednesday:

FOURTH DISTRICT – CLEVELAND

Business activity in the Fourth District continued to expand at a
modest pace, albeit at a slower rate since our last report.
Manufacturers reported a slight rise in production and new orders, while
freight transport volume continued to grow. Retail sales increased, but
were below plan for some chains. New car sales weakened slightly. Energy
companies noted little change in output. New-home construction is
sluggish, whereas nonresidential building showed continued improvement.
The demand for business and consumer credit remains low. Rising payrolls
were mainly limited to the manufacturing and energy sectors.
Staffingfirm representatives noted moderate growth in the number of new
job openings, with vacancies concentrated in manufacturing and
professional business services. Wage pressures are largely contained. We
heard fewer reports about rising prices for commodities and other raw
materials. In particular, steel firms noted a leveling off in prices for
their products, while food producers reported a slow decline in some
agricultural commodity prices.

Manufacturing. Reports from District factories indicate that
production was stable or rose slightly during the past six weeks. About
half of our respondents noted a rise in new orders. Many of our contacts
expect some slowing in the third quarter due to seasonal factors,
followed by a modest pick-up later in the year. Almost all steel
producers and service centers reported that shipping volume declined
during the second quarter, which they attributed in part to weakening in
the auto sector. Steel representatives anticipate volume remaining close
to current levels through the end of the third quarter. Shipments are
being driven primarily by heavy equipment and energy-related industries.
District auto production showed a moderate rise in June on a
month-over-month basis, as supply disruptions caused by events in Japan
diminished. Year-over-year production fell, but declines were mainly
limited to foreign nameplates. Manufacturers remain committed to raising
capital outlays in the upcoming months relative to year-ago levels. The
number of contacts who earlier reported delaying the start of projects
due to slowing in the recovery has declined considerably. Capacity
utilization rates remain below what is considered normal for a majority
of manufacturers. Reports on raw material pricing were mixed, and only a
few of our contacts said that they had passed through price increases.
Steel prices leveled off, while food producers reported a slow decline
in some agricultural commodity prices. In general, manufacturers
continued hiring at a modest pace. Wage pressures are contained.

Real Estate

New-home construction remains at a low level, with only two of our
contacts reporting an uptick in sales during June. Purchases were mainly
in the move-up buyer categories. Contractors expect that single-family
construction will remain depressed until potential buyers can more
easily sell their existing homes and the job market begins to gain some
traction. List prices of new homes held steady, while the use of
discounting grew. Upward pressure on the cost of building materials was
reported by almost all of our contacts. Spec inventories were reduced
further relative to year-ago levels. General contractors continue to
work with lean crews, and no hiring is expected in the near term. Many
subcontractors are struggling to stay in business and are bidding jobs
below cost.

Activity in nonresidential construction strengthened somewhat
during the past couple of months, with a few of our contacts noting a
significant improvement when compared to year-ago levels. Inquiries are
on the rise, and several contractors reported growing backlogs, albeit
with weak margins. Construction is taking place in a broad range of
industry sectors. Almost all of our contacts expect that activity will
continue to slowly improve as the year progresses. Financing is
available, though underwriting standards remain high. Banks are
unwilling to lend for speculative projects, and they require additional
equity when refinancing an existing property. Most of our contacts
reported normal price fluctuations for building materials. Aggressive
pricing on the part of both general contractors and subcontractors was
widespread. Construction payrolls held steady, and little permanent
hiring is expected in the upcoming months.

Consumer Spending

Reports from retailers indicate that sales for the period from mid-
May through late June rose in the low to mid-single digits. However, for
a few chains, the rate of growth was lower than expected. This was
attributed mainly to inclement weather. Transactions were mostly higher
relative to year-ago levels. Several of our contacts noted that rising
sales included some higher-priced discretionary items. One retailer said
that her overall sales were up due to elevated gasoline prices. Looking
forward, retailers expectations for the third quarter were mixed. We
continue to hear about upward pressure on supplier prices, although it
mainly affects food- and fuel-related products. Retailers passed through
some of their increases to consumers. Reports on profit margins were
mixed, with declines taken primarily by grocers. Capital outlays remain
on plan and are slightly higher than year-ago levels. A majority of our
contacts reported that they plan to expand the number of their retail
outlets. However, no change in payrolls is expected at existing stores.

Most auto dealers reported that new-vehicle sales from mid-May
through late June were below those recorded during the previous six-week
period. On a year-over-year basis, vehicle purchases increased for
almost all of our contacts. Demand for smaller, fuel-efficient cars
continues to grow. However, with some retrenchment in gasoline prices,
consumers are beginning to take a second look at SUVs and trucks.
Inventories were characterized as low by many dealers, and they believe
this may be a major contributor to slower sales. Dealers are cautious in
their outlook due to uncertainty about gas prices, the economy, and the
availability of vehicles that consumers want to buy. Demand for used
cars remains fairly strong; however, scarce inventory is contributing to
rising prices. Credit pricing remains very competitive, and the use of
leasing as a credit alternative is growing. Many dealers are in the
process of initiating factory-mandated programs for showroom upgrades
and reimaging. Little change in dealer payrolls was reported.

Banking. Demand for business loans was generally soft, with
activity driven by non profits and energy companies. A few of our
contacts noted a pick-up in construction-loan requests for multi-family
dwellings. On the consumer side, indirect auto lending was strong, while
draw-downs on home equity lines of credit tapered off. Other installment
loan categories remain weak. Many of our contacts reported downward
pressure on interest rates for business and consumer credit.
Applications for residential mortgages declined since our last report,
with submissions equally distributed between refinancing and new
purchases. Overall core deposits continue to increase, but the rate of
growth has declined. We heard a few reports of easing credit standards
for commercial and industrial loans, especially for attractive credits.
The credit quality of business and consumer applicants was characterized
as steady or improving. Most bankers reported a modest improvement in
delinquency rates. No significant changes in employment levels were
reported. However, about half of our respondents said that they expect
selective hiring to occur this year.

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

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