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

Summary.

Economic activity in the Seventh District continued to expand at a
slow pace in October and early November. Contacts noted heightened
uncertainty over the near-term economic outlook as the deadline for the
fiscal cliff approaches, but remained cautiously optimistic that growth
would pick up to a moderate pace in 2013. By sector, gains in consumer
spending were up slightly from the previous reporting period, while
growth in business spending moderated further. Manufacturing production
decelerated, while construction increased at a slow but steady pace.
Credit conditions continued to improve gradually. Cost pressures were
little changed, although food prices eased. Corn and soybean production
in the District did not suffer as much from the drought as previously
had been expected.

Consumer spending.

The pace of consumer spending, while still moderate, increased
slightly from the previous reporting period. Furniture sales improved
slightly, while sales of electronics were flat from the previous
reporting period. In contrast, retail auto sales fell, in part because
incentives have become more directed towards leasing. Overall, retail
sales surpassed expectations, which contacts attributed to promotions
and generally improving consumer confidence. Nonetheless, some retailers
noted a slower sales pace in early November, and many lowered their
expectations for the first half of 2013. In particular, contacts
expressed concern over the impact of potential changes in federal tax
policy on consumers willingness to spend.

Business spending.

Growth in business spending moderated further in October and early
November. Inventory investment continued to slow. Retail contacts
reported no transportation delays stemming from Hurricane Sandy; and
inventories, although slightly elevated, were indicated to be within
typical seasonal ranges. Steel service center inventories were also
slightly elevated, and manufacturers reported that material lead times
decreased significantly. Capital spending on equipment and structures
also slowed. A number of contacts reported that given the heightened
uncertainty surrounding the near-term economic outlook, they were
reluctant to make capital expenditures beyond productivity enhancements.
Labor market conditions improved slightly from the previous reporting
period. Job growth in manufacturing slowed, but there was an increase in
professional services employment. However, a number of firms noted that
they have put hiring plans on hold and have delayed temp-to-perm
conversion decisions until next year. Those that did report ongoing
plans to hire continued to note difficulty in finding skilled workers,
and many have created internal training programs as a result.

Construction/real estate.

Construction activity continued to increase at a slow, but steady
pace in October and early November. Multi-family construction remained a
source of strength with the continued rise in residential rents and
declines in apartment vacancies. Single-family construction also
increased. For the first time in several years, homebuilders reported
new land development projects were underway, although these remained
limited to a handful of desirable locations. Demand for nonresidential
construction continued to increase at a slow pace, with contacts noting
that many of their customers are waiting for the resolution of the
fiscal cliff and stabilization in Europe before moving ahead on capital
spending projects. Vacancy rates remained elevated for many property
types, and contacts indicated that few leasing and acquisition deals are
being made in the retail and office spaces. That said, contacts also
noted some signs of improvement in commercial real estate conditions,
pointing to moderate declines in vacancies and space available for
sublease.

Manufacturing.

Manufacturing production decelerated in October and early November.
Contacts expected activity to remain subdued in the coming year, and
voiced concerns about the potential impact of the fiscal cliff and
weaker global demand for their products. Exports to Europe and Asia as
well as many parts of South America softened, but remained stronger to
North America, particularly to Mexico. Capacity utilization in the steel
industry decreased, but an industry contact reported that orders were
anticipated to pick up some over the next two quarters. Specialty metal
manufacturers also reported weaker orders. There was continued strength
in demand from the power generation industry, and the heavy equipment
and auto industries also remained sources of strength. However, contacts
expect demand for heavy machinery to flatten in 2013 as dealer rental
fleet growth returns to more a normal pace. In contrast, improving
housing demand continued to benefit manufacturers of construction
materials.

Banking/finance.

Credit conditions continued to gradually ease in October and early
November. Credit spreads and financial market volatility remained low,
and asset quality steadily improved. Banking contacts reported modest
growth in small business loan demand, but also slower growth in debt
restructuring and leveraged finance deals as well as lower utilization
of credit lines. Contacts attributed the decrease in credit demand from
middle market customers to heightened uncertainty about future tax rates
on capital spending. Loan pricing and standards remained broadly
unchanged, with the exception of commercial and industrial and auto
lending, where credit terms and availability continued to ease. Contacts
noted that community and regional banks have been particularly
aggressive in pricing and covenants to compete with larger banks for a
limited supply of new loan opportunities.

Prices/costs.

Cost pressures were little changed in October and early November.
Several contacts noted that even though steel and scrap prices were
lower than they were a few months ago, both had increased in recent
weeks. A contact in the steel industry noted that the recent rise in
scrap prices may reflect the impact of Hurricane Sandy as well as
slightly higher global demand. Construction contacts also reported an
increase in prices of raw materials such as lumber. Retail food prices
eased, on balance, as higher prices for meat were offset by lower prices
for produce, dairy, and some other grocery items. More generally,
retailers indicated that discounting and promotions for non-food items
also eased some over the reporting period, but were expected to pick up
again after Thanksgiving. Wage pressures remained moderate, but nonwage
costs increased as many contacts again cited higher healthcare costs.

Agriculture.

The corn harvest was completed ahead of last years pace, while the
soybean harvest was proceeding more quickly than typical. Much of the
District reported higher yields than had been expected during the
previous reporting period, reflecting in part timely local rains, later
planting, and irrigation. Nonetheless, the drought still cut the
Districts output of corn and soybeans substantially relative to last
year. Concerns about crop quality due to the drought seemed to diminish,
although there were some reports of deliveries rejected for crop
diseases. Corn and soybean pricesand with them livestock feeding
costs–fell further, though they remained elevated from the levels of a
year ago. Milk, hog, and cattle prices edged up from the prior reporting
period, which also helped the cash flow of livestock operations. Sugar
beet output in Michigan was higher than a year ago, and sugar prices
were higher as well. Farmland values continued to rise despite the
drought. Moreover, there seemed to be more farmland available to buy,
partly due to uncertainty about future tax rates.

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

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