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

FOURTH DISTRICT CLEVELAND

On balance, economic activity in the Fourth District expanded at a
modest pace since our last report. Manufacturers reported some
improvement in demand. Information received from retailers and auto
dealers on the holiday shopping season was generally positive. Energy
production and freight transport volume were stable. Residential and
nonresidential construction remained sluggish. And while demand for
business loans showed some signs of a pickup, consumer borrowing was
weak.

Reports of rising payrolls were limited to the manufacturing
sector. Staffing-firm representatives noted an increase in the number of
new job openings, with vacancies concentrated in professional business
services. Wage pressures continue to be contained. Apart from elevated
commodity and steel prices, raw materials and product pricing were
fairly steady.

Manufacturing

Reports from District factories indicate that demand was stable or
rising during the past six weeks. Compared to year-ago levels,
production was higher, with many contacts experiencing low double-digit
increases. Several manufacturers noted that while their production
levels declined recentlyfollowing seasonal trendsorders were above
expectations. In general, manufacturers are fairly optimistic and expect
at least modest growth during 2011. A few noted that lead times for the
delivery of raw materials were getting longer, which they attributed to
rising demand across industry sectors. Steel producers and service
centers all reported that shipping volume had increased since our last
survey, with shipments being driven by energy-related, transportation,
and heavy equipment industries. Steel executives we spoke with have
heightened expectations for business growth during 2011. District auto
production showed a slight decline during November on a month-over-month
basis. Compared to a year ago, domestic auto makers showed a substantial
rise in production, while foreign nameplates posted a modest decline.

Capacity utilization continues to trend higher, approaching what
many of our respondents consider to be more normal rates. Inventories
are close to targeted levels. Capital spending plans are conservative,
with only a few of our contacts expecting to increase capital budgets
for 2011. Outlays are aimed primarily at maintenance, equipment
upgrades, and increasing production efficiencies. Prices for
agricultural and metal commodities, steel, and scrap remain elevated,
while the prices of most other raw materials have been stable. Several
producers announced selective product price increases to reflect a rise
in the cost of steel and agricultural commodities. Most contacts told us
that they have expanded their permanent, full-time payrolls slightly
since our last survey, and they will continue hiring at the same pace
during 2011. Permanent new hires were largely salaried. To meet rising
demand, employers are extending production hours or bringing in
temporary hourly workers. Wage pressures are contained. Companies are
continuing to restore merit increases and payments to 401K plans.

Real Estate

New home construction was generally flat at a low level during the
past six weeks and on a year-over-year basis, with most sales occurring
in the move-up buyer categories. Contractors expect construction to
remain sluggish through the winter months. List prices of new homes and
discounting have shown little change, while some upward pressure on the
cost of building materials was reported. Land purchases and construction
of spec homes are constrained by the availability of credit.
Subcontractor pricing remains very competitive. General contractors
continue to work with lean crews, and no hiring is expected in the near
term.

Discussions with nonresidential builders drew mixed responses, with
a small majority of our contacts reporting stronger activity than a year
ago. There is growing concern over the continuing slowdown in inquiries
and tightening margins. However, most builders said they had a
sufficient backlog to keep them busy in the upcoming months. New
projects generally fall into the health-care category, with some
industrial and infrastructure work. Our contacts are uncertain about
business conditions through 2011. A few builders mentioned that their
customers have the ability to fund projects, but they are hesitant to
commit. Builders expect construction material suppliers to begin raising
prices early in 2011, but they are uncertain as to the amount or whether
the increases will stick. General contractors reported no change in
employment levels and wages. Subcontractors continue to cope with very
difficult industry conditions.

-more-

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

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