WASHINGTON (MNI) – The following is the latest Beige Book survey of
economic conditions in the Federal Reserve’s Seventh District, published
Wednesday:

SEVENTH DISTRICT-CHICAGO

Summary.

Economic activity in the Seventh District continued to expand at a
moderate pace in June and early July, although once again the pace of
growth slowed from the previous reporting period. Growth in consumer
spending further moderated, while business spending increased at a
steady pace. Manufacturing production increased at a slower pace, and
construction activity continued to improve. Credit conditions improved
slightly on balance. Commodity prices moved lower, and wage increases
remained moderate. The prospects for the District’s corn and soybean
crops deteriorated, and crop prices moved higher.

Consumer spending.

The pace of growth in consumer spending further moderated in June
and early July. Retailers cited lower consumer confidence, a weaker
customer response to promotions, and extreme summer heat as the main
contributors to the lower sales pace. However, some exceptions were
noted. Demand for luxury goods remained stronger by comparison, and
sales of clothing, furniture, and home furnishings improved. In
addition, the hot weather sparked sales of swimming pools, fans, and air
conditioning units. Auto sales also improved, driven in large part by
fleet sales and an increase in manufacturers’ incentives on new fuel
efficient vehicles. Inventory levels were little changed, but some auto
dealers indicated that they were adjusting their inventory mix to
include more fuel efficient vehicles in order to meet increased demand.
Business spending. Business spending continued to increase at a steady
pace in June and early July. Inventories were generally reported to be
at comfortable levels, and most contacts indicated that capital
expenditures were proceeding as planned. Auto dealers reported facility
upgrades and a number of manufacturers indicated they were purchasing
new equipment. That said, many contacts had become more cautious about
future spending decisions, pointing to the heightened uncertainty
surrounding the federal fiscal environment and the upcoming November
elections. Labor market conditions were little changed on balance.
Part-time hiring increased on par with seasonal norms in retail trade,
although permanent workforces decreased slightly. Manufacturers reported
only moderate gains in employment, but several did note increasing the
hours of their existing workforce. A staffing firm reported weaker
demand from the manufacturing, transportation, and business services
industries but an increase in the growth rate of billable hours in the
construction and financial services industries.

Construction/real estate.

Construction continued to increase in June and early July.
Multi-family residential construction remained an area of strength,
particularly apartments, but single-family construction also increased.
Residential real estate conditions continued to improve, with home
prices and rents both edging up. A contact noted a rise in short sales
as a side effect of lenders increasingly looking to avoid the still
drawn out foreclosure process. Demand for nonresidential construction
also rose. Contacts reported several new hotel and office projects as
well as a pick-up in warehousing, industrial, and infrastructure
building activity. Commercial real estate conditions were little changed
overall. Vacancy rates remained elevated for retail and office
properties. Contacts expected that it would take a while for the pace of
absorption to pick up significantly despite an increase in capital
available for the purchase of commercial properties. Manufacturing.
Manufacturing production increased at a slower pace in June and early
July. The auto sector remained a source of strength. Several auto
suppliers noted an increase in research and development activity, as
automakers were shifting responsibility for new product design and
development away from their in-house operations. Outside of the auto
industry, conditions were mixed. Capacity utilization in the steel
industry edged lower; and while metals manufacturers indicated that
orders continued to increase, they also noted that growth had softened
some from the robust pace earlier in the year. Exports to Canada and
Mexico continued to increase, but exporters noted a decline in demand
from Europe and China. Demand for heavy equipment was steady, but a few
contacts noted that it may soon be slowing. While freight traffic
continued to be strong, the demand for heavy trucks was expected to be
flat into next year in advance of the next round of changes in emissions
standards. The lower price of natural gas was noted to have slowed
activity in the industry, as natural gas demand lagged available supply.
Contacts indicated that orders from the defense industry further
weakened in anticipation of additional defense spending cuts in the
coming fiscal year.

Banking/finance.

Credit conditions improved slightly on balance from the previous
reporting period. Demand for longer term financing continued to
increase. Credit spreads edged up, but market interest rates declined so
that net corporate funding costs were essentially flat. There was steady
growth in refinancing and lending for capital replacement, but limited
loan demand for other purposes. Middle market firms were the primary
source of loan growth. Larger firms were said to have been more
significantly impacted by the weakening European economy and have scaled
back their borrowing accordingly. Banking contacts also noted that
uncertainty over the effects of potential fiscal policy actions on both
demand and costs was reducing their customers’ demand for credit. In
contrast, consumer loan demand increased moderately, particularly for
auto loans and mortgage refinancing.

Prices/costs.

Cost pressures decreased in June and early July. Energy prices were
noticeably lower. Other commodity prices also decreased, with contacts
pointing to steel and lumber as examples. Lead times for some specialty
metals remained extended, however. Wholesale price pressures eased,
particularly for clothing. Wage pressures continued to be moderate.
Manufacturing contacts reiterated having difficulty filling open
positions for high-skill trades.

Agriculture.

Extreme heat and drought conditions spread across most of the
District, stressing both crops and livestock. Forecasts made in June
called for possibly record crops of corn and soybeans; now it appears
the District’s harvest will likely be below average, with little
prospect for improvement and plenty of downside risk. The corn crop is
in the most danger of further damage, as plants entered a critical stage
of development with insufficient moisture. Corn and soybean prices moved
sharply higher, and wheat prices also rose. Hog prices were higher,
cattle prices were little changed, and milk prices moved lower. With
higher costs and the outlook for a decline in revenue, insurance
coverage may provide an important safeguard for many farmers this year.
Insurance coverage is widespread for corn and soybeans, but is less
prevalent for some other products. Furthermore, several years of
higher-than-usual farm income have left many operations in a better
position to absorb losses this year.

** MNI Washington Bureau: 202-371-2121 **

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