WASHINGTON (MNI) – The following is the text of the Federal
Reserve’s Beige Book survey from the Chicago district, published
Wednesday:

SEVENTH DISTRICTCHICAGO

Summary.

Economic activity in the Seventh District increased further in
December, and contacts were cautiously optimistic about the outlook for
2011. Consumer spending rose more than expected, and business spending
continued to increase at a steady pace. Manufacturing production also
increased, while private construction remained weak. Credit conditions
continued to improve. Cost pressures rose, but there was limited
pass-through to downstream prices. Higher prices for agricultural
commodities boosted farm revenues.

Consumer spending.

Consumer spending increased in December, as holiday retail sales
exceeded those of a year ago. Retailers pointed to sales and promotions,
rising consumer confidence, and some pent-up demand as potential reasons
for better than expected holiday retail sales. Discretionary spending
was up this holiday seasonapparel, jewelry, and electronics accessories
were particularly strong, while big-ticket electronics and furniture
performed slightly better than a year ago. In contrast, auto dealers
reported that sales held steady in December despite an increase in
showroom traffic. Retailers, in general, expressed a positive outlook
for 2011, expecting stable, moderate growth in sales in the first half
of the year with the potential for spending to accelerate later in the
year.

Business spending.

Business spending continued to increase at a steady pace in
December. Farmers bought equipment before the end of the year to
minimize their 2010 taxes. Several retail and manufacturing contacts
reported plans to increase outlays for equipment and structures in 2011.
Inventory rebuilding leveled off with both manufacturers and retailers
indicating that inventory levels were in a comfortable range given the
current pace of sales. Hiring of permanent employees remained limited,
although a number of manufacturing contacts reported plans to increase
their workforces in the coming year. Several continued to note, however,
that finding workers with the right skills remained a problem. Temporary
hiring continued at a steady pace, with a large staffing firm reporting
stable growth in billable hours. In addition, temporary-to-permanent job
transitions were noted to be inching up for professional workers.

Construction/real estate.

Construction activity was weak in December. Although it edged
somewhat lower, the elevated inventory of unsold homes continued to
constrain new residential construction. Builders reported a decline in
signed contracts and a slight increase in contract cancellations.
Contacts also noted that credit was difficult to obtain for refinancing
or new construction in neighborhoods where foreclosures and short sales
are putting downward pressure on transaction prices and appraisal
values. Private nonresidential construction was little changed in
December. However, several construction contacts reported negotiations
with automakers that are planning to renovate or expand a number of
assembly plants in 2011. Although vacancy rates remained elevated, there
were some reports of improvement in commercial real estate conditions.
In particular, commercial subleasing activity was noted to have
increased as pricing continued to be attractive. Public construction,
driven by highway and bridge work, was again strong.

Manufacturing.

Manufacturing production improved again in December. New orders
were solid and order backlogs increased substantially. In general,
contacts expressed a positive outlook for growth in manufacturing next
year. Several manufacturers of tubes, hydraulics, and other fluid power
products noted that activity had returned to its previous peak levels of
2008, and was expected to increase further in the coming year. The
fabricated metals, automotive, and heavy equipment sectors were also
expected to remain strong sources of growth. A contact reported that
global steel consumption was likely to reach an all-time high in 2011.
In addition, contacts noted that pent-up demand remains in the motor
vehicles sector, with the average age of both light and heavy vehicles
still rising. Demand for heavy trucks, in particular, was expected to be
even stronger than previously anticipated. In contrast, a contact in the
appliance industry noted that shipments were weaker than expected in the
fourth quarter, but were still higher than the prior year.

Banking/finance.

Credit conditions continued to improve in December. Corporate
credit spreads for a number of large firms in the District were slightly
improved even as market interest rates were increasing. Although demand
for liquid assets remained elevated, several contacts noted a
substantial increase in risk appetite, which, in particular, benefitted
equity markets. The profitability of financial firms increased despite
tighter interest rate margins, as loan quality continued to improve.
Core loan demand from middle market firms remained limited, as these
businesses continue to hold large amounts of cash on their balance
sheets. However, contacts noted more inquiries for loans to finance
merger and acquisitions as well as an end-of-year increase in demand for
small business loans. Consumer credit demand was stronger than expected.
Financial market participants were cautiously optimistic in their
outlook for financial and economic conditions in 2011, although a few
questioned the sustainability of recent improvements, as they expected
business and household deleveraging to continue for some time.

Prices/costs.

Cost pressures increased in December, but limited pricing power
again constrained pass-through to downstream prices. Retailers reported
that, on balance, wholesale prices edged up further, although there were
some large increases in wholesale apparel prices. Most retailers were
accepting lower profit margins with pass-through limited to increases in
delivery and other small surcharges. Commodity prices, notably for oil,
steel, rubber, and lead, increased. However, contacts thought that only
a limited and gradual pass-through of higher materials prices would take
place. Wage pressures remained moderate.

Agriculture.

Net farm income was higher than a year earlier. Crop insurance
helped stabilize revenues in areas where there had been disappointing
yields. There were, however, reports that some farmers were taking
losses because they earlier had oversold their crop production on
futures markets at lower prices. Agricultural land values and farmland
cash rental rates for the next growing season increased sharply. Demand
for crops remained strong in December, with a notable boost from
increased exports to Asia. Crop inventories remained low compared with
the high level of demand. Prices for corn, soybeans, and wheat rose
during the reporting period. Input costs for crop farms were steady so
that margins continued to improve. Hog and cattle prices also increased;
while milk prices were generally lower, pressuring the margins of dairy
producers.

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

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