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

SEVENTH DISTRICT – CHICAGO

Summary.

Economic activity in the Seventh District continued to expand at a
moderate pace in January and early February. Growth in consumer spending
slowed, but business spending increased. Manufacturing production
increased, and construction, while still subdued, was also up. Credit
conditions improved. Price increases slowed, while wage increases
remained moderate. Prices for corn, soybeans, wheat, hogs, and cattle
moved higher, while milk prices drifted lower.

Consumer spending.

Growth in consumer spending slowed in January and early February.
Contacts indicated that activity was boosted by clearance sales and
noted an increase in consumers turning to discount retailers. There was
also some isolated improvement in the luxury segment, with jewelers and
high-end boutiques reporting higher sales. However, the mild winter
depressed sales of apparel and other weather-related items, and contacts
noted that many retailers were running heavy promotions on unsold winter
merchandise to make room for spring inventory. Auto sales were up in
January, but down slightly in early February reflecting in part a
decline in incentives.

Business spending.

Business spending increased in January and early February. Most
retailers indicated their inventories were at comfortable levels.
However, a number of auto dealers continued to report lower than desired
levels for some models. Several manufacturers also noted that they were
tightly managing their input inventory levels to avoid being caught
off-guard were commodity prices to decline further or activity slow
substantially from the pace of the fourth quarter. Capital spending
increased, with reports of capacity expansions in manufacturing and
renovations of existing facilities in the retail sector. Labor market
conditions improved, although hiring remained selective. A staffing firm
reported an increase in growth in billable hours that was largely driven
by gains in industrial and office positions. Contacts indicated that
many manufacturers were increasingly moving away from contracting with
temporary agencies to direct hiring, focusing on higher skilled
positions where attracting job candidates has remained difficult.
Long-term unemployment remained elevated. Labor market analysts reported
that it was becoming increasingly difficult for these workers to find a
job, and several contacts indicated that they were hesitant to hire
individuals who had been out of work for an extended period of time.

Construction/real estate.

Construction activity was up slightly in January and early
February. Multi-family construction continued to be an area of strength.
In contrast, single-family construction remained weak, and homebuilders
indicated that it will likely continue to be until home prices stabilize
from their recent declines. Nonresidential construction continued to
trend up moderately, although a contact noted a decline in funding for
new public infrastructure. Demand for industrial facilities increased,
especially in the automotive sector as suppliers are expanding to meet
the higher pace of vehicle production. Commercial real estate conditions
continued to improve with vacancy rates edging lower from their elevated
levels. The demand for office space picked up and rents increased. In
contrast, contacts continued to report excess availability of retail
space.

Manufacturing.

After a strong close to 2011, manufacturing production increased
further in January and early February. Contacts in the sector remained
cautiously optimistic about 2012. Exporters continued to benefit from
advantageous terms of trade, and contacts noted an increase in interest
by foreign manufacturers in moving production to the U.S. as well as
increasing utilization of domestic suppliers. The auto industry
continued to be a source of strength. Contacts expected that auto sales
in 2012 would hold near the pace seen in January, which, while still
below pre-recession levels, would mark another year of recovery for the
industry. Demand for heavy equipment also remained strong, led by robust
activity in the energy and mining sector. An aging fleet of heavy trucks
and machinery and tightening emission standards for such equipment were
noted as reasons for the likely continued strength in demand in 2012.
Manufacturers of specialty metals also reported solid order books and
robust quoting activity. Outside of these industries, however, activity
was again weaker. Manufacturers of household goods and building
materials continued to experience soft demand, although a few noted a
small improvement since the beginning of the year.

Banking/finance.

Credit conditions were slightly improved from the previous
reporting period. Financial market volatility declined and risk premia
moved lower across a number of asset classes. Improvements in the
availability of credit were noted for both subprime auto lending and
commercial real estate, particularly for large apartment buildings.
Banking contacts indicated that loan growth continued at a moderate pace
with demand from larger businesses being stronger than that from small
to mid-sized companies. Even though contacts thought the economic
outlook was more positive, they indicated that borrowers and investors
remain cautious, citing uncertainty about future tax code changes and
risks abroad, in particular those emanating from Europe. That said,
concerns about Europe were reported to have become milder in recent
weeks.

Prices/costs.

Cost pressures were largely unchanged in January and early
February, but the volatility of commodity prices remained a concern for
many contacts. Natural gas prices remained at historic lows, while
prices increased for fuel and metals such as copper and brass. Raw
materials surcharges declined and lead times shortened with a few
exceptions such as carbide and some hydraulic products. Wholesale price
changes were mixed by category, but little changed on balance.

Most of the cost increases were being passed on to consumers, but
retailers reported that, overall, pricing power remained limited. Wage
pressures continued to be moderate, with most contacts indicating that
wage increases were expected to keep pace with inflation. Contacts
continued to report a shortage of skilled manufacturing workers, and
noted that increased competition among firms had led to some upward
pressure on their wages.

Agriculture.

Corn, soybean, wheat, hog, and cattle prices rose during January
and early February. Input costs for agriculture continued to increase,
led by sharply higher rental rates for cropland. The increases in these
costs have pressured farmers’ margins. In order to offset the risks of
price declines or poor harvests, farmers have been willing to spend more
on revenue insurance policies. Estimates of corn stocks have come down
and are below where they were a year ago. Given current rates of use,
the expected supply of corn in stock just before the next harvest is
around three weeks, about as tight as last year. Cattle operations are
working to build herd sizes, even though bid prices for cattle are very
high. Contacts expected farmers to boost their capital expenditures in
2012 compared with 2011.

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

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