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

The pace of economic activity in the Seventh District picked up
some in September. However, contacts continued to note uncertainty about
the economic outlook and expressed concerns about recent financial
market developments. Consumer spending was moderately higher and
business spending increased slightly. Manufacturing production picked
up, while construction was little changed. Credit conditions again
tightened. There was further passthrough of elevated wholesale prices to
the retail level. Corn, soybean, wheat, milk, and hog prices decreased,
while cattle prices increased.

Consumer spending

Consumer spending was up moderately in September. Auto sales were
higher, due in part to increased incentives. On balance, non-auto retail
sales were essentially flat, though there were considerable differences
in sales growth across types of goods. For instance, spending on
electronics and appliances was up, while spending on furniture and
apparel was down. Sales of luxury goods continued to show some strength,
and sales in the lower price ranges of essential goods like personal
care items and groceries also rose. Retailers outlook for consumer
spending remained very uncertain; and several contacts indicated that
lower consumer confidence and spending fatigue after heavier-than
normal-promotions during the back-to-school season had made them less
optimistic about the upcoming holiday season.

Business spending

Business spending increased slightly in September. Several
manufacturing and construction contacts reported purchasing equipment,
with the incentive to take advantage of a higher level of accelerated
tax depreciation set to expire at year-end adding to the expected
benefits of expanding capacity and improving efficiency. A few
manufacturers who anticipated stronger demand also reported building
inventories of raw materials now due to concerns about potential long
lead times for these inputs in the future. In contrast, retailers were
closely monitoring inventories, and some were paring them back. Hiring
remained slow. A staffing firm noted slower growth of billable hours for
staffing and professional services. In contrast, shortages of qualified
candidates were reported in healthcare, information technology,
engineering, and skilled manufacturing trades. These were most
problematic in manufacturing, and many manufacturers indicated that they
were addressing the shortfalls through training programs (including
cross-training) for new and existing employees. Looking ahead, a
recruitment firm indicated that many employers have lowered their
expectations for staffing needs in the coming year. Retail contacts
expected minimal seasonal hiring this holiday season, and instead
planned to lengthen the workweek for permanent workers.

Construction/real estate

Construction activity was again subdued in September. Residential
real estate conditions remained weak; builders reported very little new
single-family home construction and showroom traffic remained steady at
a low level. Mortgage refinancing, however, picked up with the recent
declines in mortgage rates. Nonresidential construction was little
changed, on balance. Contacts noted an increase in industrial demand, in
particular from manufacturing and distribution clients, whereas demand
from the retail sector leveled off. Commercial real estate conditions
improved slightly, with vacancy rates edging down, rents stabilizing,
and incentives to attract new tenants increasing. Subleasing activity
also rose, with contacts noting an increase in seasonal demand for
short-term sublets in strip malls.

Manufacturing

Manufacturing production rebounded in September, with new orders
and order backlogs increasing. Demand for heavy equipment was strong,
led by robust activity in the construction, energy, and mining sectors.
Contacts attributed much of the pick-up in construction equipment to
replacement of dealer rental fleet inventory, which they expect to
continue moving forward. Demand for heavy and medium-duty trucks also
increased. Auto production was higher in September, reflecting
rebuilding of inventories. District auto suppliers reported that recent
orders had exceeded expectations along with concerns of being able to
meet any additional demand in the near-term. Capacity utilization in the
steel industry remained elevated. Production of industrial metals was
up, while manufacturers of consumer products reported some softening.
Activity for food processors continued to be robust. Contacts were
cautiously optimistic about near-term prospects, pointing to continued
gains in productivity, strength in demand from Asia and Brazil, and
increased sales to local manufacturers looking to shorten their supply
chains in the aftermath of the disruptions caused by the Japanese
disasters in the spring. However, they remained concerned about the
global economic outlook, with several noting a reluctance to expand
capacity given elevated uncertainty.

Banking/finance

Credit conditions tightened further in September. Volatility in
financial markets remained elevated, although it was lower than in
August. Corporate funding costs edged higher, particularly for financial
firms, even though benchmark interest rates moved lower. Banking
contacts noted softer business and consumer loan demand, as clients were
pulling back on spending in light of increased risks coming from Europe
and the weakness in U.S. economic activity. Most lending activity was
still in the form of refinancing, which picked up with lower long-term
interest rates. In another positive sign, contacts noted an increase in
M&A activity among middle-market firms, even with the increase in
spreads and lower liquidity in the high yield and term loan markets.

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

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