WASHINGTON (MNI) – The following is the text of the latest Beige
Book survey of economic conditionw in the Federql Reserve’s
Fourth District, published Wednesday:

FOURTH DISTRICT — Cleveland

Business activity expanded in the Fourth District since our last
report, although the rate of growth remains modest. On balance,
manufacturing output rose. In the real estate sector, nonresidential
construction picked up, while reports on single-family housing starts
were mixed. Sales of existing family homes increased. Retailers and auto
dealers saw a modest improvement in sales during August and September on
a year-over-year basis. Shale gas activity continued at a robust pace,
while coal production fell below prior-year levels. The slowdown in
freight transport volume, which began in the second quarter, has abated.
And the demand for business and consumer credit moved slightly higher.

Little net hiring was reported across industry sectors. We heard a
number of reports that recruiting qualified workers for open positions
remains difficult. Staffing-firm representatives said that the number of
job openings and placements has slowed during the past six weeks.
Vacancies were found primarily in healthcare and manufacturing. Wage
pressures are contained. Input prices were stable, apart from increases
in some agricultural commodities and petroleum-based products.

Manufacturing

District factories reported that production levels were stable or
increased during the past six weeks, while new orders weakened. Rising
production was mainly limited to goods sold to the construction, energy,
and transportation sectors. Compared to prior-year levels, output was
higher for a majority of our contacts. Several producers pointed to a
rise in inventories, but said that they are manageable. The outlook by
manufacturers was mixed. Steel producers and service centers reported
that shipping volume was flat or down and they continued to reduce their
inventory. A seasonal pickup that typically begins in September has yet
to materialize. Several contacts noted that competition (volume and
pricing) from offshore producers has intensified. Steel producers do not
expect market conditions to change appreciably in the upcoming months.
District auto production recovered in August on a month-over-month
basis, as auto plants returned to normal production schedules. Compared
to a year ago, production figures were down slightly for domestic
producers, while showing a moderate rise for foreign nameplates. The
latter is attributable to the abatement of supply chain issues. Little
change in capacity utilization was reported, although a majority of our
contacts said that rates were slightly below normal levels.

Capital spending remained on track, but several producers intend to
delay some projects during the upcoming months. Raw material prices were
either flat or trended lower, while finished goods prices were steady.
Little change in payrolls was noted, although attracting skilled workers
remains very difficult. Wage pressures are contained. Real Estate.
Reports from home builders on single-family housing starts were mixed.
Compared to a year ago, construction activity was described as similar.
On balance, builders expect a modest rise in new-home construction in
the near term. Spec building remains on the low side, due in part to
difficulty in obtaining financing. List prices of new-homes held steady,
though most builders indicated that they have cut back on discounting.
Sales contracts were found across all price-point categories. Reports of
higher prices for lumber, shingles, and concrete were widespread, rising
mainly in the mid-single digits. Sales of existing homes continued to
show improvement, although inventory is tight in the mid-price range.

Nonresidential contractors reported that business activity
continued to improve, and most are satisfied with their backlogs going
into 2013. Project work is driven by industrial (manufacturing and
energy), education, healthcare, multi-family housing, and some public
works. Most contractors expect that the momentum built up this year will
be maintained in 2013, though some commented that customers seemed
hesitant about moving forward at this time. Material price increases
were mainly limited to petroleum-based products.

Residential and nonresidential builders reported little change in
their payrolls. Some seasonal layoffs are expected. A few builders said
that they would like to hire more workers but are hesitant to do so
because of uncertainty surrounding the upcoming election and the fiscal
cliff. Wage pressures are contained, but sharp increases in health
insurance premiums were noted by many contacts. Subcontractors are
holding their prices steady and many are finding it difficult to recruit
skilled trades.

Consumer Spending

Retailers reported a modest improvement in sales during August and
September relative to year-ago levels. Consumers have responded
positively to new lines of fall merchandise and back-to-school sales
were characterized as good. Some retailers noted that consumers in
middle-income brackets have entered a holding pattern until after the
elections. Our contacts expect growth in the fourth quarter to be in the
low-to-mid single digits relative to 2011. Vendor pricing has been
stable, with little change in shelf prices. Grocery store chains
reported that their costs have risen due to the summer drought. Attempts
at passing through higher food prices were met with mixed results.
Capital spending for the year remains on target. Two retailers noted
that they may accelerate spending before years end, mainly for
distribution equipment. No permanent hiring is expected other than at
new stores. The number of temporary workers expected to be hired for the
upcoming holiday season is planned to be a little higher than last year.

New-vehicle sales were stronger in August and September when
compared with the same time period a year ago. Dealers reported that
sales of fuel-efficient cars and crossover vehicles are doing
particularly well. New-vehicle inventories increased since our last
report and most dealers described them as acceptable. Dealers expect
little change in monthly sales for the remainder of 2012. Used-vehicle
sales were flat, which was attributed primarily to a lack of inventory.
Most dealers reported that credit is more readily available and leasing
is growing in popularity. Hiring for sales and service positions remains
at a slow pace. Recruiting qualified people is challenging.

Banking

Demand for business credit moved slightly higher since our last
report, with requests mainly for commercial loans and refinancings.
Several small business owners told us that it remains difficult for them
to obtain credit. The interest rate environment was described as very
competitive. Consumer lending was up a little, driven by demand for auto
loans and home equity lines of credit. In the residential mortgage
market, activity is fairly strong. Although a majority of applicants are
still looking to refinance, many bankers noted an increase in
new-purchase requests. No changes were made to loan application
standards. Delinquency rates continued to improve across consumer loan
categories; however, several bankers reported an uptick in delinquencies
from commercial customers. Core deposits grew, especially in transaction
accounts. Bankers expect little change in payrolls for the remainder of
this year.

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

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