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

Summary.

Economic activity in the Seventh District continued to expand
slowly in June and early July. Contacts expressed heightened uncertainty
about the economic outlook given recent weaker-than-expected demand as
well as the ongoing fiscal issues in the U.S. and Europe. Consumer and
business spending edged up. Manufacturing production continued to expand
at a steady pace while construction remained flat. Credit conditions
again improved modestly, despite increased volatility in financial
markets. Commodity prices remained elevated, and there was further
pass-through of these costs to prices downstream. After a late start to
planting, crop conditions began to return to normal, but dryness and
above-average temperatures were concerns for farmers in parts of the
District.

Consumer spending.

Consumer spending picked up some in June and early July. Consumers
took advantage of retailers’ efforts to clear inventory through early
summer promotions. Spending on apparel and accessories increased as did
expenditures on household goods like power equipment and lawn and garden
items. In contrast, auto sales edged lower in June, as incentives
decreased and showroom traffic declined; sales then improved moderately
in early July. Small passenger cars and pickup trucks continued to
account for most new vehicle sales. Inventories of small passenger cars
remained lean due to continued supply disruptions for Japanese vehicles
and higher demand for domestically produced small cars. Demand for used
vehicles remained strong, and with used car inventories relatively low,
prices rose further.

Business spending.

Business spending also edged up from the previous reporting period.
Inventory investment decreased, but expenditures for equipment and
structures increased. Several manufacturers reported plans to expand
capacity, with a number of projects set to break ground in the District
this fall. Renovation of retail facilities picked up further. In
addition, contacts reported an increase in spending on research and
development. Hiring continued at a slow pace, with many manufacturers
reiterating the difficulty in finding appropriately skilled workers. On
balance, however, labor market conditions weakened, as a number of
private and public sector layoffs were reported and unemployment ticked
up in the District. Furthermore, a large staffing firm reported a
decline in billable hours.

Construction/real estate.

Construction activity remained subdued in June and early July.
Construction of new single-family homes slowed, while the construction
of apartment buildings increased. Residential real estate conditions
remained weak. The spring and early summer season saw a slight uptick in
new home sales in the District, which, according to contacts, tends to
be a leading indicator of the sales volume for the remainder of the
year. In addition, although more potential homebuyers are qualifying for
mortgages, contacts noted that downward pressure on existing home prices
continues to restrict the availability of credit for new single-family
construction. In contrast, nonresidential construction edged up with
continued strong demand for industrial facilities, particularly from the
automotive sector, partially offset by continued weakness in office and
retail construction. Commercial real estate conditions also improved,
albeit moderately. Vacancy rates edged lower, with net absorption
stabilizing in the retail segment and rebounding in the office market.

Manufacturing.

Manufacturing production continued to expand at a steady pace from
the previous reporting period. Automakers indicated that production was
recovering from the Japanese supply chain disruptions in the second
quarter. Auto inventories remain relatively low, but given recently
lower sales, contacts reported that production would likely recover less
sharply than previously expected. A contact in the auto supply industry
noted that production losses from the Japanese disasters had been
smaller than anticipated, but that efforts to work around supply
disruptions resulted in increased expenses for labor, logistics, and
parts, putting pressure on suppliers’ margins. Capacity utilization in
the steel industry reached its highest point since 2008; additional
capacity is being added, but at a slow rate. In addition, contacts
reported that steel service center inventories are tight. Several
manufacturers of industrial metals reported increases in orders as well
as significant backlogs in June; however, a few also noted slower
activity in recent weeks. Despite some softening in demand from Asia and
Europe, overall demand for heavy trucks and equipment continued to be
strong, driven by fleet replacement and robust activity in the mining
sector. In contrast, shipments of household appliances declined.

Banking/finance.

On balance, credit conditions improved modestly in June and early
July. Funding costs and liquidity tightened marginally and volatility
increased in a number of financial markets. In addition, contacts
expressed concern about the negative consequences that a potential
sovereign default would have on financial markets. Credit availability
continued to improve, though standards remained tight for many
borrowers. Competition among lenders for the highest-quality customers
has been stiff, lowering the cost of capital for these borrowers.
Business loan demand was steady. Businesses continue to mostly refinance
existing debt, though a contact noted that increasingly such deals were
also beginning to include an expansionary element. Consumer loan demand
improved, with the pace of deleveraging by consumers slowing somewhat.
The rate of improvement in both business and consumer loan quality
reportedly flattened out.

Prices/costs.

Cost pressures remained elevated in June and early July. Food
prices continued to rise, while prices for energy and some industrial
metals, like steel, declined. Despite these recent declines, prices for
many commodities remain elevated, and contacts indicated that fuel
surcharges and shipping costs have yet to come down. Many wholesale
prices also continued to rise, with pass-through of these higher costs
to the retail sector picking up from the previous reporting period. Wage
pressures, however, remained moderate.

Agriculture.

There were mixed changes in crop conditions throughout the
District. A small percentage of acres along the Missouri River were lost
to flooding. Though there was some concern about recent above-average
temperatures, contacts still see the potential for good to excellent
corn and soybean yields this fall, contingent upon favorable weather for
the rest of the summer. Historically low stocks of corn and soybeans
have put a premium on delivery commitments before harvest. On balance
over the reporting period, cash prices for corn, wheat, and cattle were
down while prices for soybeans, milk and hogs prices moved higher; all
of these prices, however, remained above the levels of a year ago.
Livestock operations faced margin pressure from high feed costs. Some
elevators were under financial pressures due to expanded margin calls on
their contracted positions as well as higher costs for planned input
purchases for next year’s crop.

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

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