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 moderate pace in April and May, although at a touch slower
rate than during the prior reporting period. Many contacts remained
cautiously optimistic in their outlook for the U.S. economy. Several,
however, also noted an increase in economic uncertainty, pointing to
weaker business conditions in Europe and Asia and the upcoming elections
in the U.S. Growth in consumer spending slowed, while business spending
continued to increase at a steady pace. Manufacturing production also
rose at a steady pace, and construction activity increased as well.
Credit conditions were little changed on balance. Commodity prices moved
lower, and wage increases remained moderate. Planting of corn and
soybeans was well ahead of the normal pace and that of a year ago.

Consumer spending. Consumer spending increased at a slower rate in
April and May. Retailers indicated that the slower sales pace was due in
large part to the unseasonable weather that had boosted activity during
the prior reporting period. Spending on necessities increased, while
outlays for big-ticket items like furniture, appliances, and electronics
decreased. Inventories generally were at more seasonally appropriate
levels. Looking ahead, some retailers are planning to add to inventories
in expectation of a better back-to-school season than last year. Auto
sales were flat, and auto dealers expect that sales will remain at about
this pace through the fall. Some dealers continued to report difficulty
in stocking popular models because of supply chain constraints. Business
spending. Business spending continued at a steady pace in April and May.

Inventories generally were reported to be at comfortable levels.
Strong expected sales growth, high rates of capacity utilization, and
the need to replace aging equipment continued to support manufacturers
expenditures on plant and equipment. Outside of manufacturing, firms
were more cautious in their capital spending, citing increased economic
uncertainty. Labor market conditions were little changed over the
reporting period. Hiring remained selective, and most contacts indicated
that they had not changed their hiring plans. Some manufacturers were
increasing overtime, but noted that orders were not yet strong enough to
necessitate adding to their labor forces. Those manufacturers who were
looking to hire continued to report difficulty in finding skilled
workers. Several said they were easing job requirements, using
internships, or increasing college recruiting to try to fill open
positions.

Construction/real estate. Construction and real estate activity
increased in April and May. Demand continued to be strong for
multi-family construction, especially apartments, but also increased for
single-family homes. The residential rental market strengthened, with
rents rising further and one contact noting a shortage of single-family
properties for lease in parts of the District. Realtors indicated that
they were also beginning to see a pickup in demand in the forpurchase
market for single-family homes, as more sales had multiple offers on
them. Commercial real estate conditions also continued to improve
gradually. Demand increased for urban office space, hotels, and
education facilities, while it remained weak for suburban office and
retail space. Vacancy rates edged lower, but remained elevated,
particularly for retail properties. A contact noted, however, that some
suburban retail space was being switched over to alternative uses.

Manufacturing. Manufacturing production increased at a steady pace
in April and May. Capacity utilization in the steel industry reached its
highest level since the end of the recession, as stronger demand from
North American customers offset weaker demand from Europe and Asia. The
auto industry remained a source of strength for manufacturing. Auto
suppliers were operating at high levels of capacity utilization, but
noted that production growth had stabilized after the large gains
earlier in the year. Demand for heavy equipment, though still strong,
decreased slightly. Contacts expressed some concern over current
weakness in global demand, but indicated that the industry was still
being boosted by domestic demand, notably by a robust rental market and
continued strength in the energy and mining sectors. Agricultural and
construction equipment were also noted as areas of strength, with
dealers adding products for the upcoming construction season.
Manufacturers of household goods and building materials continued to
experience soft demand, although a few noted a recent pick-up in
activity.

Banking/finance. Credit conditions were little changed on balance
from the prior reporting period. Credit spreads and market volatility
edged up. Business loan demand remained limited apart from steady growth
in refinancing and capital replacement. For large banks, some of the
weakness in the business loan segment has been offset by an increase in
demand for other services, such as foreign exchange hedging and
liquidity management. Banking contacts indicated that there continues to
be fierce competition among lenders for creditworthy borrowers. Contacts
also noted an increase in the availability of credit for commercial real
estate and consumer auto loans, while lending standards for residential
mortgages remained tight.

Prices/costs. Cost pressures leveled off in April and May. Steel
prices softened, with one contact noting that weaker demand in Europe
and Asia had contributed to the decline. Energy prices also moved lower.
Wholesale price pressures eased some, most notably for cotton and dairy
products, although transportation costs continued to increase. Retailers
indicated that they were largely absorbing the higher transportation
costs in their margins and continued to discount heavily items such as
clothing. Wage pressures continued to be moderate, although many
contacts noted an increase in healthcare costs.

Agriculture. District corn and soybean planting in April and May
were well ahead of last years pace, as well as the five-year average.
Corn planting was almost finished in Illinois, Indiana, and Iowa. The
emergence of corn and soybean plants generally was also faster than
typical. With an early and promising start, the corn crop may set a
record this year, although dryness currently exists across much of the
District. Corn and soybean prices fell during the reporting period,
while wheat prices rose. Milk prices decreased, and prices are low
enough to trigger some concerns about margins for dairy operations. Hog
and cattle prices were higher.

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

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