WASHINGTON (MNI) – The following is the text of the Chicago
section of the Federal Reserve’s Beige Book report on current financial
conditions released Wednesday:

SEVENTH DISTRICT-CHICAGO

Summary. The rate of growth of economic activity in the Seventh
District picked up in late November and December. Contacts were
generally optimistic about the economic outlook for 2012, but many also
expressed concern about potential weakness in demand from abroad,
particularly from China and Europe. Consumer spending increased, while
business spending was steady. Manufacturing production increased.
Construction was again subdued, although conditions in real estate
markets improved slightly. Overall, credit conditions were little
changed from the last reporting period. Wholesale price increases
slowed, but there was some further pass-through to the retail level.
Corn, soybean, and cattle prices increased, while milk and hog prices
decreased.

Consumer spending. Consumer spending continued to increase in late
November and December. Compared to last year’s holiday season, store
traffic volumes were up significantly while nominal spending was up only
moderately as consumers reportedly were making more shopping trips and
aggressively bargain hunting to obtain the lowest prices. Several
contacts noted an increase this year in online shopping and a greater
prevalence of flexible and low-cost shipping options. Traditional
holiday retail items such as electronics, sporting goods, hobby items,
music, books, toys, and apparel all sold well. Contacts additionally
reported more spending on luxury items this year. Auto sales increased
since the last reporting period. Dealers reported that showroom traffic
volumes were up, and many expected sales to continue to improve further
in 2012. Importantly, contacts cited a continued boost from replacement
demand in light of the record high average age of vehicles in the U.S.

Business spending. Business spending was steady in late November
and December. Contacts reported that inventory levels were generally
in-line with sales, although inventory rebuilding continued in the auto
industry in the aftermath of the supply chain disruptions earlier in the
year. Capital investment plans were largely unchanged, with several
manufacturers moving ahead with planned increases in capacity. Hiring
remained selective, but the majority of contacts indicated plans to
increase employment next year. A staffing firm noted slower growth in
billable hours and below-average seasonal hiring in office and clerical
positions. However, they also indicated that permanent placement
activity continued to increase for industrial positions. Manufacturers
again cited difficulties in attracting job candidates with ideal skill
sets in technical fields such as engineering. Many of these firms
indicated that they would rather postpone hiring a candidate until
economic conditions improve to a point that would clearly warrant them
doing so.

Construction/real estate. Construction activity was subdued in late
November and early December, but there was some improvement in overall
real estate conditions. Builder showroom traffic picked up slightly,
although in general residential real estate market conditions remained
depressed as foreclosed properties continued to put downward pressure on
prices and single-family construction remained at low levels. In
contrast, multi-family construction continued to be an area of strength.
The number of residential leases being signed increased from the
previous reporting period and rents rose. Nonresidential construction
was also up moderately with the strongest gains in Class A properties.
Contacts noted greater demand for both industrial and healthcare
facilities. In addition, commercial real estate conditions improved
slightly with commercial rents stabilizing and a decline in the
available amount of sublease space.

Manufacturing. Manufacturing production increased in late November
and December. Contacts in the manufacturing sector were more optimistic
for 2012 given the pace at which their order books are filling through
the first quarter. Auto production increased over the reporting period.
However, some contacts still are concerned about the ability to ramp up
production much further over the near-term because auto suppliers may be
approaching capacity constraints. Demand for heavy equipment remained
strong, led by robust activity in the energy and agriculture sectors.
Exports also continued to be a source of strength, although slower
growth in China and Europe was noted to have held back sales at some
firms. In the steel sector, inventories at service centers remain near
desired levels, and given the continued strength in the auto, energy,
machinery, and mining sectors, steel production was expected to increase
in the first quarter of 2012.

Banking/finance. Credit conditions were little changed during the
reporting period. Corporate funding costs, while variable, were largely
unchanged on balance. Liquidity remained relatively scarce in the high
yield debt markets. Banking contacts indicated that business loan demand
continued to be subdued, with the exception of some large multinational
mining corporations. Businesses utilization of credit lines was only up
a bit. Because lenders continue to see their clients’ balance sheets
growing stronger, they speculated that uncertainty about future business
conditions was restraining the demand for credit. However, contacts also
noted that some larger manufacturers are making loans to sub-tier
suppliers out of retained earnings, thus reducing these suppliers’
typical demand for credit from financial institutions. Prices/costs.
Cost pressures eased in late November and early December. While pressure
on costs remained from commodities such as steel and food, it moderated
significantly for cotton and energy goods. Pass through of elevated
material costs to consumers continued.Wage pressures remained moderate,
with contacts noting that annual increases in wage and non-wage benefits
were largely in-line with last year’s increases.

Agriculture. Farm income for 2011 was higher than in 2010; and
farmland values and cash rental rates were reported to be higher once
again. After falling initially during the reporting period, corn and
soybean prices rose in the last half of December. More generally, crop
prices fell during the harvest period. However, most crop deliveries
involved sales at pre-harvest prices, as many end users found it
necessary to ensure sufficient supplies prior to the harvest. In
contrast, for those who didn’t pre-sell, more of their crop ended up
being put into storage. Milk and hog prices fell during the reporting
period, while cattle prices increased. Still, export demand helped keep
prices for both dairy and meat products higher than they were at the end
of 2010. Input costs have risen for the coming planting season.

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

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