WASHINGTON (MNI) – The following is the text of the Federal
Reserve’s Beige Book survey Seventh District summary, published
Wednesday:

Summary. The pace of economic activity in the Seventh District
picked up moderately in September. Contacts were generally more
optimistic about the outlook for the remainder of the year and the
beginning of 2011. Manufacturing production increased, and construction
activity improved slightly. Consumer spending continued at a steady pace
and business spending increased. Credit conditions continued to
gradually improve. Price and wage pressures were moderate, while
agricultural prices increased on balance.

Consumer spending. The pace of consumer spending was little changed
from the previous reporting period. Contacts indicated that consumers
were slowly regaining confidence, although they remain very
price-conscious. As such, promotions and sales persisted as the primary
driver of traffic in stores and showrooms. Retail sales excluding autos
in September were nearly on par with the August sales pace. Clothing
items continued to sell well, as did electronics and appliances; but
furniture sales were again weak. Auto sales held steady even as fewer
incentives were offered and access to credit continued to slowly
improve.

Business spending. Business spending increased in September.
Capital spending rose as recent tax accounting changes pulled forward
demand before the year’s end. Contacts indicated that spending was
heavily concentrated in replacement of older equipment and other
efficiency improving investments. While less widespread, new investments
in capacity, research and development, and employee training were also
reported. In contrast, inventory rebuilding slowed. Both manufacturers
and retailers reported comfortable levels of inventories in September,
even though they remain relatively lean historically. The pace of hiring
continued to be slow, but engineering, information technology, and
healthcare were exceptions to this trend. Manufacturers’ were reluctant
to add permanent employees, continuing to use temporary hires instead.
In addition, the manufacturing workweek leveled off, as firms pulled
back on overtime. Contacts also noted that state and local government
employment was sharply declining given the budgetary constraints faced
by several District states and their local municipalities.

Construction/real estate. Construction activity improved slightly
in September. With housing inventory still elevated, residential
building was minimal, particularly for multifamily properties. A contact
noted, however, that a few large builders had begun to rebuild their
inventory of single-family homes after a recent uptick in contract
signings. Attractive pricing led to higher showroom traffic, but
contacts indicated that the limited availability of conventional
mortgage financing remained a constraint for potential buyers. Private
nonresidential construction remained subdued, particularly for office
and retail buildings. However, rising vacancy rates leveled out in many
areas of the District, and contacts reported small improvements in
demand for large industrial and small retail facilities. Public
infrastructure construction continued to expand.

Manufacturing. Manufacturing production increased in September,
refreshing from the late summer pause. Several metals manufacturers
reported that September sales were the best so far this year. Power
generation, mining, and medical equipment manufacturers also reported an
increase in orders. In addition, export activity continued to be robust
with slower growth in developing countries in Asia and South America
offset by strengthening demand from Europe. The automotive and heavy
equipment sectors remained strong sources of growth. In contrast, a
manufacturer of household appliances noted a reduction in fourth quarter
production, and capacity utilization in the steel industry edged lower.
Although contacts in some industries indicated that new orders and order
backlogs had eased as inventory rebuilding slowed going into early
October, manufacturers in general expressed a very positive outlook for
the remainder of 2010 and early 2011.

Banking/finance. Credit conditions continued to gradually improve
in September. Contacts indicated that the corporate financing
environment remains very favorable, but the availability of credit for
small businesses remained a source of concern for some. Business loan
demand was steady, driven mostly by refinancing and merger and
acquisition activity. Recent tax law changes and increasing pressure
from shareholders to productively employ the large amounts of cash on
firm balance sheets were seen as contributing to the latter.
Furthermore, a contact noted that private equity funds that are required
to invest funds by year-end or return them to investors were another
likely factor. Investment demand for distressed commercial properties
remained strong. Moreover, limited improvement in the availability of
bank loans for commercial real estate was noted, although it was
concentrated among a few banks.

Prices/costs. Price and wage pressures were moderate in September.
Retailers reported wholesale price increases were becoming more
widespread. Prices also moved higher for industrial metals like copper,
aluminum, zinc, and gold. Shortages of silicone and copper contributed
to the increase in industrial metal prices. The depreciation of the
dollar was cited as one of the primary drivers of higher demand for
gold. Energy costs, in contrast, were steady with natural gas prices at
historically low levels. Limited pricing power continued to constrain
pass-through of cost pressures to downstream prices. Wage pressures
again increased only modestly on balance, although some contacts
highlighted large expected increases in the cost of healthcare for
employees.

Agriculture. The District harvest started early and progressed
rapidly, although parts of Iowa and Wisconsin had a slower harvest due
to heavy rains. Corn yields varied widely, sometimes even within the
same field. The quality of the corn crop was, however, higher than a
year ago. Soybean yields were reported as above-average in most of the
District, with soybean disease issues in Iowa appearing to be limited in
scope. Corn and soybean prices were above the levels of a year ago.
Contacts indicated that farmers were selling soybeans, but holding on to
newly harvested corn in the hope of even higher prices. Prices for milk,
hogs, and cattle remained higher than last year, helping offset a sudden
increase in feed costs for livestock. Fertilizer costs also increased,
but drying costs for corn decreased substantially from the previous
year.

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

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