WASHINGTON (MNI) – The following is the text of 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 in
late August and early September, but again at a slow pace. However, contacts
remained guardedly optimistic that conditions would improve; noting that at
least some of the uncertainty surrounding the outlook was likely to be resolved
following the November election. Growth in consumer spending was little changed,
while business spending increased at a slower rate. Manufacturing activity edged
lower, and growth in construction moderated. Credit conditions continued to
improve gradually. Cost pressures increased some, due in large part to higher
food and energy prices. The drought led to an earlier start than normal for the
harvest, and corn and soybean prices moved down a bit.

Consumer spending. Growth in consumer spending was little changed in late
August and September following a slight pick-up in the previous reporting
period. Sales of back-to-school items were somewhat below retailers’
expectations despite higher store traffic volumes. Contacts noted that the rise
in gasoline prices had further deterred consumers from increasing discretionary
spending. Retailers lowered their expectations for the holiday shopping season,
although they still expect holiday sales to match last year’s pace. Auto sales
increased in August before moderating some in September. Consumers responded
strongly to model year-end incentives, depleting inventories of 2012 models, and
also benefitted from easing auto credit conditions.

Business spending. Business spending continued to increase slowly in late
August and September. A number of contacts reported that firms were delaying
hiring and capital expenditure decisions until they were more certain about the
outlook for federal tax and spending policies. That said, some capital
expenditures were proceeding as planned, particularly on software and equipment.
Inventories were generally indicated to be at comfortable levels. Labor market
conditions were weaker on balance. The District unemployment rate edged up and
hiring remained selective. A recruiting firm indicated that overall demand for
their services was effectively flat at last year’s levels. Demand was greater in
areas such as health care, engineering, accounting, information technology, and
skilled manufacturing trades where firms are having difficulty finding qualified
candidates. Several manufacturers reported stepping up training programs and
increasing pay to meet staffing needs in a number of skilled trades.

Construction/real estate. Growth in construction moderated some from the
previous reporting period. Homebuilders indicated that new single-family
construction continued to rise at a slow but steady pace, while multi-family
construction was stronger by comparison. Loan standards for residential
development remained tight, and many homebuyers also continued to face tight
lending standards. Home prices edged higher, despite a rise in short sales.
Nonresidential construction increased at a slower rate. Contacts indicated that
new projects were progressing at a reduced pace; some also suggested that many
firms were putting off investment decisions until after the November election.
Elevated vacancy rates remained a drag on new commercial construction, and
contacts noted that bank lending for investment properties continued to be
limited.

Manufacturing. Manufacturing production edged lower in late August and
September. Contacts reported that new orders had slowed considerably from
earlier in the year and that order backlogs were coming down. Nonetheless, a
number of contacts also indicated that quoting activity for next year had picked
up, suggesting to them that the recent slowdown may be a pause due to the
upcoming election and uncertain fiscal situation. Although the level of activity
remained strong, demand for heavy equipment softened over the reporting period,
largely reflecting further declines in the mining sector and a slower expansion
of rental fleets. Exporters generally noted weaker demand outside of North
America, particularly from Europe and Asia. Capacity utilization in the steel
industry was steady, while steel service center inventories increased slightly.
In contrast, the auto industry continued to be a source of strength, and
manufacturers of building materials reported that activity had picked up with
the recent improvement in the housing sector.

Banking/finance. Credit conditions continued to improve over the reporting
period, with both credit spreads and market volatility decreasing. Banking
contacts reported continued weak demand for business loans. While loan pricing
was roughly unchanged, contacts cited greater demand for more flexible
structures and longer financing terms. Standards continued to ease on C&I loans,
although conventional financing remained difficult to obtain for many small
businesses. Asset quality improved further, surpassing the expectations of some
contacts. An exception was agricultural lending, particularly the livestock
sector, where the impact of the drought on feed costs is putting stress on
operators’ balance sheets. Consumer loan demand was again limited with moderate
increases in auto lending and mortgage refinancing, as auto loan standards
continued to ease and mortgage rates moved lower.

Prices/costs. Cost pressures increased some in late August and September,
primarily due to a rise in food and energy prices. Contacts also reported
increases in the prices for construction materials like lumber and drywall,
while most metals prices were steady. Wholesale food and energy price pressures
rose, and retail contacts noted an increase in pass-through to consumers.

Wage pressures remained moderate, although some upward pressure on wages
for high skilled positions was cited. A few contacts also reported upward
pressure on healthcare costs.

Agriculture. The corn and soybean harvest began a few weeks earlier than
normal across the District, as plants were dry due to the drought. In some
areas, late rains helped produce higher- than-anticipated yields, but these made
only a small dent in the large drought-related losses. Crop quality also was an
issue in parts of the District. The drop in crop volume hurt grain elevators
relatively more than crop farmers, as payments from crop insurance and sales at
high prices offset much of the loss in farm income from the drought. However,
given insurers’ limited processing capacity and the large number of claims,
already existing delays in crop insurance payments are likely to get worse. Corn
and soybean prices eased down from their peaks, providing a bit of relief for
livestock producers, though most operations remained unprofitable. Milk and
cattle prices moved higher, while hog prices fell. Many hog facilities are
operating below capacity, pointing to future reductions in supplies of pork.

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

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