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

On balance, economic activity in the Fourth District held steady
during the past seven weeks. Manufacturers reported that the rise in
production which began late last year is leveling off. Contacts in
nonresidential construction cited fewer inquiries and a small drop in
backlog, while residential builders noted that new home construction has
slowed. Retail sales were flat to up slightly, whereas auto dealers
reported a slight downturn in new vehicle purchases. Energy production
increased modestly, and reports indicated a continuing upturn in freight
transport volume. Demand by businesses and consumers for new loans
remained weak.

A small pickup in employment was limited to the manufacturing
sector. Staffing-firm representatives reported some improvement in the
number of new job openings, with opportunities concentrated in the
healthcare field. Wage pressures continue to be contained. Apart from a
downward trend in steel and lumber prices, raw materials and product
pricing was generally stable.

Manufacturing. Reports from District factories show that production
levels were mainly steady or down slightly during the past seven weeks.
Manufacturers who cited increased output attributed it to seasonal
factors. Production was higher on a year-over-year basis, with many
contacts citing double-digit increases. A large majority of respondents
believe that demand growth seen earlier this year is tapering off, and
they expect production will stabilize at current levels or show a modest
decline. Most steel producers and service centers reported a slight
downturn in volume, which was expected. Shipments are being driven
primarily by energy-related and metal fabrication industries.
Construction volume remains very weak. Although this time of year is
traditionally slow for the steel industry, our contacts are not overly
confident that shipments will pick up in the fourth quarter. District
auto production was fairly stable in June on a month-over-month basis,
while year-over-year it rose substantially for both domestic and foreign
nameplates.

Little movement was seen in inventories, although we heard a few
reports that finished durable goods inventories were beginning to rise.
A majority of our contacts stated that their capacity utilization rates
are below pre-recession levels, with little change during the past few
weeks. Capital outlays continue at relatively low levels, and business
owners are approaching spending decisions with caution. Steel producers
and service center representatives reported that their prices are on the
decline, reflecting a downward trend in steel production input costs.
Other raw material costs have been fairly stable. Companies continue to
expand payrolls and extend work hours, but at a slower pace. Wage
pressures are contained.

Real Estate. In general, new home sales have slowed during the past
seven weeks and on a year-over-year basis. Most of our contacts cited
tight credit as one of the primary factors contributing to the slowdown.
Homebuilders are not expecting a turnaround in new home construction
this year, with several anticipating a further decline in sales. Our
contacts tell us that entry-level homes are beginning to regain sales
momentum, with lessening activity in the move-up and third-time
home-buyer categories. Little change was noted in the list prices of new
houses, and reports indicate that the rise in construction material
costs is leveling off, especially for lumber products. Skeleton crews
remain the norm for general contractors and subcontractors.

Signs of a pickup in nonresidential construction cited in our past
two reports are beginning to diminish. Although building activity
remains steady, several of our contacts reported declining inquiries and
a slight drop in their backlogs. Most inquiries and new projects
underway fall within the industrial and government-funded infrastructure
categories. The glut in commercial space shows no signs of lessening.
Half of our contacts expressed a heightened level of uncertainty about
construction activity in the near term, though others remain cautiously
optimistic. Little change in construction material costs was reported.
We heard numerous accounts of contractors and clients struggling to
obtain financing. Other than seasonal hiring, employment rolls are
steady. Many subcontractors remain underutilized and are taking on
projects at cost.

Consumer Spending. For the period from mid-May through mid-June,
retail sales were generally flat or up slightly when compared to the
previous 30-day period. Purchases of apparel and food products are doing
well, while spending on discretionary items has weakened. Retailers are
somewhat less optimistic about future sales than in our last report;
however, they still expect buying to show a small improvement going into
the fourth quarter. Vendor and store pricing has been stable. Most auto
dealers saw new vehicle sales slow from mid-May through mid-June, when
compared with the previous 30 days. Dealers indicated that the rising
sales trend present in the spring has leveled off, and they are not
expecting a return to robust growth in the near term. Many dealers said
that their inventories are low, which was attributed to seasonal
factors. Used vehicle purchases were characterized as holding up
reasonably well. Our contacts told us that they are finding it more
challenging to arrange financing for customers with less than the
highest credit rating. Reports show little change in staffing levels at
retailers or auto dealers.

Banking. The market for business lending remains soft, with bankers
characterizing the demand for new loans as flat to improving slightly.
Interest rates are stable. On the consumer side, loan demand is
generally weak. Those seeing a slight uptick attributed it to draw-downs
on home equity lines of credit. We heard a few reports of downward
pressure on auto loan rates. The residential mortgage market continues
at a slow pace, with several bankers noting that activity is below
expectations, given current mortgage rates. Core deposits are steady or
up at most banks, with much of the growth occurring in transaction
accounts. Reports on credit quality were mixed. Delinquency rates
declined or held stable for nearly all banks; still, several of our
contacts noted that delinquencies remain above historic norms.
Employment rolls and wages are stable.

Energy. Reports show little change in oil and natural gas output
during the past seven weeks, with output expected to remain flat in the
near term. Spot prices for natural gas rose slightly, while oil prices
dropped. Reports on coal production have grown more positive. Export
producers are experiencing increased demand for both steam and
metallurgical coal, while unseasonably warm weather increased the demand
for coal by electric utilities. Prices for coal were mixed but are
tending to the up side. Production equipment and materials costs were
generally flat. Staffing levels are steady, and little hiring is
expected in the near future. Wage pressures are contained.

Transportation. Freight transport executives reported continuing
favorable volume trends, with only moderate gains to their bottom lines.
Although most of our contacts are cautiously optimistic in their
outlook, they expect that the rate of volume growth experienced in the
second quarter will begin to moderate. One contact noted industry-wide
concern over the strength of consumer demand. Several respondents
commented that they are attempting to negotiate rate increases, with
some degree of success. Major capital purchases remain at or near
replacement rates. However, due to aging fleets and growing demand, the
need to replace equipment may grow toward year-end. Several of our
contacts noted that quoted prices for tractors and trailers are rising.
Current hiring is primarily for replacement only. If volume continues to
build, freight executives expect to add capacity in the near term.

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

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