beige book federal reserve jan 2013

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1/16/13 FRB: Beige Book - January 16, 2013

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Summary of Commentary on Current Economic Conditions by Federal Reserve District

Prepared at the Federal Reserve Bank of Philadelphia and based on information collected on or before January 4,2013. This document summarizes comments received from businesses and other contacts outside the FederalReserve and is not a commentary on the views of Federal Reserve officials.

Reports from the twelve Federal Reserve Districts indicated that economic activity has expanded since the previousBeige Book report, with all twelve Districts characterizing the pace of growth as either modest or moderate. Since theprevious Beige Book, activity in the New York and Philadelphia Districts rebounded from the immediate impacts ofHurricane Sandy. Growth in the Boston, Richmond, and Atlanta Districts appears to have increased slightly, while theSt. Louis District reports some slowing.

All twelve districts reported some growth in consumer spending. Overall, holiday sales were reported as being modestlyhigher than in 2011, though sales were below expectations for contacts in many of the Districts. Auto sales werereported as steady or stronger in ten Districts. Citing concerns that consumers will spend cautiously due to ongoingfiscal uncertainty, retail contacts and auto dealers reported a slightly dimmer, though positive, outlook for future sales.Tourism activity was reported to have increased across much of the nation due to strong business and internationaltravel, early snowfall in some ski areas, and a rebound in areas disrupted by Hurricane Sandy.

Activity among nonfinancial service sectors improved overall. Firms within the six Districts reporting on transportationservices generally noted increased volumes. Manufacturing was mixed overall since the previous Beige Book; sixDistricts reported an expansion of activity and three reported a decrease. Among Dist ricts reporting on their firms' near-term expectations, the manufacturing outlook remained generally optimistic ; however, capital spending plans were lessuniformly positive.

Since the previous Beige Book, real estate activity has expanded or held steady in eleven Districts for existing homesales and leasing; eight Districts for residential construction; eleven Districts for nonresidential sales and leasing; andnine Districts for nonresidential construction. Overall loan demand was steady in five Districts, rose in four, and fell inone. Credit standards were largely unchanged, except in two Districts where there were some signs of loosening. SixDistricts reported improving credit quality and/or falling delinquency rates.

Although rain partially eased drought conditions for some agricultural regions in three Districts , reports of agriculturalactivity remained mixed. Districts reported that energy and mining sector activity was steady at high levels for mostenergy-related products but s ignificantly weaker in coal production and coal-related investments.

Trends in wages, prices, and employment conditions were relatively unchanged in the Federal Reserve Distric ts. Inputprice pressures were reported to be steady overall with mixed reports for specific commodity prices in various Districts.Employment conditions were also litt le changed since the last report. However, hiring plans were more cautious for firmsdoing business in Europe or in the defense sector. W age pressures were stable in all twelve Districts, though several

Districts cited greater pressures for firms that reported difficulties finding qualified workers with specific skills.

Consumer Spending and Tourism

Since the previous Beige Book, consumer spending increased to some degree in all twelve Districts. Across the nation,holiday sales grew modestly compared with last year but came in below expectations in the New York, Cleveland,Atlanta, Chicago, and San Francisco Districts . Boston reported continued strong demand for clothing, shoes, andfurniture, and San Francisco reported robust online sales. A major retail chain in New York indicated that sales pickedup in early January. Retail sales were flat in Richmond except for gains in food and auto sales. Expectations for futuresales were positive but mild, particularly in Philadelphia, Kansas City, and Dallas where contacts cited the impact offiscal cliff uncertainty on consumer spending.

Reports of auto sales were steady to stronger in ten Districts. Richmond, Atlanta, and San Francisco noted strongsales. New York and Dallas cited mixed sales that were generally positive, while auto sales in Kansas City slowed butremained higher than a year ago. Some dealers in the Chicago and Kansas City Districts reported high levels ofinventory. Contacts in Philadelphia, Cleveland, Kansas City, and Dallas expect consumers to react to ongoing fiscaluncertainty, thus dimming a posi tive outlook for future sales. Chicago auto dealers were more upbeat, expect ing strongernew car sales due to pent-up consumer demand, easing credit conditions, and rising used vehicle prices.

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Beige Book - January 16, 2013
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www.federalreserve.gov/monetarypolicy/beigebook/beigebook201301.htm 2

Tourism held steady or grew in all but one of eight reporting Districts. Coastal activity had fallen in the immediateaftermath of Hurricane Sandy throughout most of the New York and Philadelphia Districts but has rebounded in all butthe hardest hit areas. Boston, Atlanta, and San Francisco reported strong tourism in their Districts, with Boston andAtlanta c iting business and international travel as st rong contributors. W inter tourism activity in the Minneapolis Districtwas strong in areas with snow, while Richmond reported normal winter activity in its District.

Nonfinancial Services

Overall, nonfinancial services have grown modestly since the previous Beige Book. Businesses in the New York andPhiladelphia Districts recovered from the disruption of Hurricane Sandy. The Boston, Minneapolis, and San FranciscoDistricts reported positive growth among various service sectors, while the Richmond District reported stable to st rongerdemand for service firms. Boston reported strong demand for some health-care IT services and drug impact research,while San Francisco noted relatively weak demand for health-care services. Staffing firms in the Dallas Dist rict reportedsteady to slightly softened demand. Respondents remained optimistic about growth over the near-term in the Boston,

New York, Philadelphia, Minneapolis, and Dallas Districts.

Transportation services were generally positive among the six Districts that reported. Freight t ransport shipping volumeimproved in the Cleveland District due to rising demand from the retail sector and areas affected by Hurricane Sandy.Atlanta reported increases in trucking tonnage and total railroad carloads, but low river levels caused delays inMississippi River traffic. Reports from transportation services in the Dallas District were mixed, and most firms expectweak growth in the near-term. Trucking firms in the Richmond District reported a flattening in revenues; however, theDistrict's port activity was boosted by ships diverted by Hurricane Sandy.

Manufacturing

Reports of manufacturing activity were mixed overall, with six Districts growing since the last Beige Book, three Distractscontracting, and two Districts reporting little or no change. Firms in the Boston and Chicago Districts reported continuedexpansion of activity at modest and moderate rates of growth, respectively. Overall activity once again appeared toexpand in the San Francisco District , although it was mixed across sectors. Gains in the aerospace and chemicalsectors contributed to growth in the Boston and San Francisco Districts, as well as in the Dallas District. Manufacturingin the Chicago Dist rict grew with contributions from the auto and housing-related sectors. Manufacturing continued toexpand, but at a more modest pace, in the Richmond District. Several firms cited falling export demand, especially fromEurope.

In contrast to slight declines in the past Beige Book, firms in the Philadelphia and Minneapolis Districts reported slightlyincreased manufacturing activity. As in other Districts, product flowing into supply channels for auto production andhousing construction contributed to Philadelphia's gains. Prior trends continued as firms in the New York Districtexperienced little or no growth, except for the revenues of firms in the New York City area that recovered after HurricaneSandy disruptions. Reports continued to be mixed among sectors in the Dallas District.

Manufacturing activity within the Cleveland and Atlanta Districts, and reported plans in the St. Louis District, declinedsomewhat--a trend reversal from the prior Beige Book. Contributing to the declines were steel and auto producers inCleveland and makers of HVAC equipment, electric components, food, and automobile parts in St. Louis. Despiteproduction gains in electrical equipment, appliances, and components, more pronounced contractions within the broadnondurable goods sector led to a continuation of declining activity in the Kansas City District.

Manufacturing firms' expectations of future activity were generally optimistic in the New York, Philadelphia, Atlanta,Minneapolis, and Kansas City Districts; the level of optimism has significantly increased in the Philadelphia and AtlantaDistricts since the previous Beige Book. Contacts in the Chicago District expect vehicle production to expand in 2013,while reports of activity from manufacturers in the St. Louis District have been negative on net. Boston Dist rict firms

reported that capital spending was slow, except for select growth sectors. Capital spending was on track in theCleveland District and was slowly increasing in the Chicago Dist rict. Looking ahead, Philadelphia District firms havesignificantly increased their capital spending plans, while the outlook in the Minneapolis District was reported as flat. Inthe Cleveland District, more contacts plan to reduce outlays than expand capacity.

Real Estate and Construction

Existing residential real estate activity expanded in all Districts that reported; growth rates were described as moderateor strong in nine Districts. Contacts in the Boston District attributed their strong sales growth to low interest rates,affordable prices, and rising rents. All Dist ricts reporting on price levels saw increases; New York and Chicago reportedonly very minor increases. The five Distric ts that reported on housing inventories all reported falling levels. New residentialconstruction (including repairs) expanded in all but one District of those Districts that reported. Contacts in the KansasCity District reported that increased lumber and drywall costs limited construction, causing a slight decline this period.Hurricane Sandy disrupted construction activity initially in New York, but this has since led to increased work forsubcontractors on repairs and reconstruction.

Though a little weaker than residential real estate, reports on sales and leasing of nonresidential real estate are stillmostly positive--described as modest on average. The Boston District reported a drop in leasing beyond normal seasonaltrends; contacts cited fiscal cliff uncertainty as a factor. Minneapolis and Kansas City reported increased demand and

tightening commercial real estate markets. Philadelphia, St. Louis, and Dallas all reported more modest increases innonresidential real estate activity. Nonresidential construction is weaker than residential, with only slight to modestgrowth. The Boston District reported that demand for commercial real estate loans appears to be softening and that thepipeline for new construction projects has diminished significantly since the last report. Dallas reported that constructionwas expected to pick up in the commercial real estate sector in 2013.

Banking and Finance

Overall, loan demand was largely unchanged in the Philadelphia, Cleveland, Richmond, Kansas City, and San FranciscoDistricts, with most of these Districts reporting a continuation of slight to moderate growth in total volume. The NewYork, Atlanta, Chicago, and Dallas Districts reported stronger demand than previously, while the St. Louis Districtreported a s light decline. Some increased lending in Philadelphia, Chicago, and Dallas was driven by businesses tak ingout loans for special year-end purposes such as tax planning and dividend payments. Cleveland, At lanta, Chicago,Dallas, and San Francisco all reported strong auto lending. Demand for residential mortgages improved in Cleveland,Atlanta, Chicago, Kansas City, Dallas, and San Francisco. Commercial real estate lending was cited as a particularbright spot by New York, Cleveland, Kansas City , and Dallas. However, lenders in San Francisco remained reluctant tolend to real estate investors outside of the multifamily residential sector. San Francisco also reported a slight slowdownin IPO, venture capital, and private equity activity in that District's technology sector.


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Banks in the New York, Philadelphia, Cleveland, Chicago, Kansas City, and San Francisco Districts reportedimprovements in asset quality. Lenders were described as competing aggressively for highly qualified borrowers inPhiladelphia, Richmond, Atlanta, and San Francisco. In Atlanta, this stiff competition may be leading to loosening creditstandards, as there was some indication that banks were more willing to increase their tolerance for risk. Chicago banksalso reported some loosening of standards. On the other hand, lending standards remained largely unchanged in NewYork, Cleveland, and Kansas City.

Agriculture and Natural Resources

Reports of agricultural activity were mixed, although rain and mild temperatures delivered some relief from droughtconditions to parts of the Richmond, Atlanta, and Chicago Districts. Low water levels along the Mississippi River alsohampered transport for some contacts in the Chicago and Kansas City Districts. Despite the drought, some contacts inthese Districts reported that farm income remained high with adequate crop insurance and historically high prices.Producers in the Kansas City and Dallas Districts expect ongoing dry conditions to hurt the winter wheat crop.

Activity in the energy sector had mixed reports. Production of oil and natural gas held steady at high--sometimes record--levels in the Cleveland, Richmond, Minneapolis, and Dallas Districts. San Francisco reported that activity expanded tohistoric levels. Contacts in the Cleveland District reported that shale gas activity grew at a robust pace. In contrast, coalproduction has declined in the Cleveland, Richmond, Chicago, St. Louis, and Kansas City Districts since the previousBeige Book. Firms in the Atlanta District continue to plan investments, ranging from reserve development to increasedrefining and petrochemical operations to new pipeline infrastructure.

Employment, Wages, and Prices

Labor market conditions remained mostly unchanged in all Districts. The Boston, Richmond, Atlanta, Chicago, KansasCity, and San Francisco Districts all reported delayed hiring, often in defense manufacturing, due to fiscal cliffuncertainties. Companies in the Chicago District with trade or investment exposures to Europe reduced their hiring plansas well. Chicago reported that manufacturers are choosing to cut hours instead of reducing head count in expectation ofproduction rebounds in 2013. Atlanta and Kansas City cited health-care policy changes and costs as another cause forminimal hiring. On the other hand, the New York, Atlanta, Minneapolis, and Dallas Districts saw the labor market firmingmodestly. Finally, contacts in several Districts reported difficulties finding qualified workers in some specialized fields,such as skilled manufacturing, energy, and IT.

For those Dist ricts that reported, wage pressures have been stable since the previous Beige Book and were mostfrequently described as contained or subdued. The San Francisco Dist rict reported modest wage pressures that wereheld down by an abundance of workers. The Richmond, Chicago, and Minneapolis Distric ts characterized wage growthas moderate. Specifically, business contacts in the Minneapolis District expected to increase wages 2 to 3 percent in2013, while oil drilling companies in North Dakota and Montana expected higher increases. Several Districts reportedwage pressures in sectors experiencing labor shortages, such as energy and IT. The New York and Chicago Districtsreported higher year-end bonuses ahead of anticipated tax increases in 2013.

Overall, input price pressures appear to be stable. The Boston, Philadelphia, Cleveland, Richmond, Minneapolis, Dallas,and San Francisco Districts reported steady input prices, while Chicago reported decreasing raw materials prices. TheNew York, Atlanta, and Kansas City Districts characterized input prices as slightly increasing; price pressures in theseDistricts were passed through to consumers somewhat in the form of higher finished goods prices. However, Chicagonoted that businesses were unable to fully pass on meat and milk price increases to consumers. The Philadelphia,Cleveland, Chicago, Kansas City, and San Francisco Districts all cited rising prices for construction-related materials.Specifically, a Philadelphia builder noted that over the past 90 days these rising prices added about 3 percent to the costof a new home.

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First District--Boston

Economic activity in the First District continues to grow modestly, according to business contacts. Most retailers andthe tourism industry cite year-over-year increases in demand. Aside from some firms with industry-specific or customer-specific issues, First District manufacturers also report growth in sales from a year ago. Similarly, consulting andadvertising firms are ahead of a year earlier, although a couple of companies with fast growth over the last few years haverecently seen business level off. Commercial real estate contacts are somewhat downbeat; office leasing is slow anddemand for commercial real estate loans and pipelines for commercial construct ion activity are weaker than in recentreports. Residential real estate markets continue to recover, with both sales and prices in November above year-earlierlevels. In all sectors, most respondents are holding their selling prices level. Contacts say their hiring depends ondemand growth; as a result, most firms are doing little to no hiring, but some firms are expanding headcountssubstantially. Notwithstanding ongoing concerns with uncertainty, contacts generally expect continued modest growth in2013.

Retail and Tourism

One contact reports a small single-digit year-over-year decrease in December sales while the others ci te increases

ranging from near zero to 7 percent. Demand remains strong for clothing, shoes, and furniture. Responding retail firmsexpect to hold their selling prices steady based on an absence of price increases at the wholesale level. These contactsanticipate that 2013 will be characterized by low single-digit growth in sales.

The tourism industry ended 2012:Q4 on a high note, establishing new records for hotel room occupancy rates andrevenues. Strong domestic and international corporate business travel and international leisure t ravel account for much ofthis performance. Restaurants saw less spending on corporate entertaining and end-of-year holiday events. Advancehotel booking data indicate that the strong trend in business travel will continue, leading to an expectation thatoccupancy rates will hold level in 2013 compared to the high benchmark established in 2012.

Manufacturing and Rela ted Services

Manufacturing in New England continues to expand at a modest pace according to First District contacts. Of 11responding firms, seven report higher sales in the fourth quarter than in the same period a year earlier, although in somecases the gains are quite modest. Two contacts in the semiconductor industry continue to report a cyclical downturn intheir business. A contact in aerospace says that sales of parts for new airplanes are extremely strong but depressedconditions in the aftermarket have spread from the United States to Europe. A contact in the chemical industry says thatwhile sales in pounds fell, the pricing picture improved so much that sales in dollars are up. Sales of frozen fish continue
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to be weak. The "fiscal cliff" was an explicit problem for a computer firm that sells almost exclusively to DefenseDepartment customers who are worried about sequestration.

Only five of the 11 respondents report significant hiring. Firms with rapidly growing sales are hiring, but firms in slow-growth industries are not. A biotech firm with 3,500 U.S. employees plans to add another 1,000 over the coming year,about half domestically. The computer supplier with customers dependent on defense spending cut its staffing by 10percent to 15 percent over the period from June to September. A contact in the chemical industry reports both good andbad news about the labor market. On one hand, he says that for the first time since the crisis began, workers arevoluntarily leaving to take new jobs. The bad news is that he is having great difficulty filling low-skill jobs. He says thatdrug test fails are much more common than in the past; in addition, a large number of workers quit almost immediatelyafter taking the job. The contact speculates that both of these hiring problems may result from behaviors developedduring extended periods of unemployment.

As with employment, capital spending is generally slow except for firms in growth industries, with four firms reportingincreases and four reporting decreases in spending. One diversified manufacturer of parts for the aerospace and autoindustries reports that business units within the firm failed to spend their planned capex allocations in 2012.

The outlook continues to be uncertain for most of our contacts. Only one firm, the defense supplier, cites the fiscal cliffas a serious problem and even they expect some resolution in the new year.

Selected Business Services

Consulting and advertising contacts in the First District report generally positive results for the fourth quarter. Severalcontacts report modest growth, while two contacts--whose firms have experienced rapid growth over the past two years--experienced a leveling off. Marketing and advertising contacts report a slight uptick during the fourth quarter and areconfident that business conditions have finally stabilized after the recession, which hit them with a lag. Two contactswith exposure to health care note robust demand for services related to health-care IT implementation and drug-impactsresearch. At the same time, firms focused on the pharmaceutical industry have experienced slow growth, although onecontact expects that pharmaceuticals will start to emerge from its rough spell in 2013. Economic consulting remainsstrong because of high levels of complex high-stakes litigation; management and strategy consulting contacts report flatbusiness conditions as clients uncertain about fiscal policy and the macroeconomy remain reluctant to invest inconsulting services.

Contacts report little to no cost increases and are keeping their prices relatively unchanged. One exception is anadvertising firm where health insurance costs rose 12 percent in 2012. Some contacts report no hiring, consistent with alack of demand growth, while others report net hiring in the low single digits . Plans for future hiring are modest, withcontacts generally expecting zero to low single-digit workforce increases in 2013.

Most contacts expect growth to pick up in 2013, with the exception of a government contractor, who is too uncertainabout the future of fiscal policy to offer any forecast. No one expects another recession and overall they express a senseof cautious optimism.

Commercial Real Estate

Across most of the First District, leasing activity in the final weeks of 2012 is described as very light, driven by acombination of seasonal factors and uncertainty stemming from fiscal cliff negotiations. However, a Portland contactnotes an uptick in leasing activity in that city in December, especially in the warehouse sector, although officefundamentals remain flat amid s low employment growth. Boston's warehouse market improved as well, while the city'soffice vacancy rate remains high--also attributed to slow employment growth--and the trend toward office downsizingpersists. In Hartford, the fate of large downtown properties that experienced foreclosure in 2012 remains uncertain; a keyquestion is whether current owners will reinvest in the properties or resell them as is. Demand for commercial real estateloans in the region appears to be softening, while the pipeline of new construction projects in Boston has diminishedsignificantly since the last report.

Most contacts in the region are cautiously optimistic that commercial real estate fundamentals will improve in 2013.However, growth expectations remain very modest and some contacts note downside risks to growth from pending fiscalcontraction and ongoing political uncertainty, even taking into account the recently-enacted federal tax deal.

Residential Real Estate

Across the First Dist rict, contacts report st rong year-over-year growth in sales for November in both single-family homeand condominium markets. Similar to previous reports, contacts attribute continued growth in sales to low interest rates,affordable prices, and rising rents. Contacts say that buyers have become more confident about purchasing a home aseconomic conditions continue to improve. As buyer activity increased, inventory levels fell throughout the region.Contacts argue that declining inventory levels have now translated into higher prices in most areas. The median saleprice of homes rose year-over-year across the First District, with some states experiencing significant increases.

In terms of outlooks for the coming year, contacts continue to feel positive about improvements in home values andstrong sales. Significant year-over-year growth in sales is expected for the most of 2013, although a warm winter last

year coupled with a potentially harsher winter this year may soften year-over-year growth in the coming months. InMassachusetts and the Greater Boston area, contacts express concern that dwindling inventory levels will discouragebuyers and even potentially deter some sellers who would like to purchase a replacement home before listing theircurrent one; at the same time, they express worry about prices appreciating too quickly, but say they are not concernedwith ongoing moderate price appreciation. Notwithstanding these potential concerns, contacts across the region aregenerally very optimistic about the strength of the housing market in 2013.

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Second District--New York

Economic activity in the Second District has shown signs of rebounding since the last report, as widespread disruptionsfrom Superstorm Sandy largely diss ipated. On balance, the labor market firmed, with manufacturers reporting flatemployment but non-manufacturing contacts indicat ing some pickup in hiring. Manufacturers and other firms report morewidespread price hikes than in recent months, while retail prices were steady to up moderately. Retailers report thatholiday-season sales were steady to somewhat higher than this time last year but slightly below plan. Auto sales inupstate New York were mixed but generally strong in November and December. Tourism activity slumped in November,in the aftermath of Sandy, but rebounded somewhat in New York City in December. Both residential and commercial real


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estate markets were generally steady since the last report. Finally, bankers report a pickup in demand for commercialmortgages but steady demand on other types of loans; they also report no change in credit standards, narrowing loanspreads, and widespread decreases in delinquency rates.

Consumer Spending

Holiday season sales were up modestly from last year but came in slightly below plan. A trade association survey ofretailers across New York State indicates that sales were disappointing in the days leading up to Christmas as well asin the days after. A major retail chain indicates that sales were below plan in November and December but picked upfairly dramatically in early January. Retail contacts in upstate New York report that sales were flat to up compared to ayear earlier. Retailers attribute the weaker than expected holiday sales to a combination of online shopping, mildweather, fiscal cliff concerns, and, in some parts of the region, slow insurance payouts to those affected by Sandy.Retail prices were reported to be steady or up moderately.

Buffalo-area auto dealers indicate that vehicle sales picked up in November but were expected to be flat to slightly lowerthan a year earlier in December. However, Rochester-area dealers report strong sales for both months to end 2012.Tourism act ivity slumped in the immediate aftermath of Sandy. Even hotels in the Albany area were reportedly affectedby the storm, as widespread meeting and conference cancellations pushed down hotel occupancy rates in November. InNew York City, Broadway theaters report that attendance and revenues rebounded after a deep post-Sandy slump in thefirst half of November. Still, December attendance was down 5 to10 percent from a year earlier, while revenues were littlechanged. Finally, consumer confidence in the region weakened at year end. The Conference Board's survey of residentsof the Middle Atlantic states (NY, NJ, Pa) showed confidence falling to its lowest level in more than a year, while SienaCollege's survey of New York State residents indicated a modest decline.

Construction and Real Estate

Residential real estate markets in the District were generally steady since the last report, with the storm having littlediscernible effect on the overall market. New York City's rental market appears to have lost some momentum during thefinal two months of 2012, as rents in Manhattan and Brooklyn retreated and were up only slightly from a year earlier. Theinventory of available rental apartments, however, remained low in late 2012. Apartment sales activity in New York Citywas robust in the fourth quarter--particularly in Manhattan. A major appraisal firm attributes some of the high salesvolume to looming tax changes and notes that there has been a flood of appraisal requests for tax-related financialplanning. Prices are reported to be flat to up slightly . In contrast, an overhang of inventory has kept prices from rising in

northern New Jersey and Long Island. Sandy disrupted construction activity in late 2012, though a contact in thehomebuilding industry notes that construction sub-contractors are getting a great deal of work from storm-related repairsand reconstruction during a typically slow season.

Office markets were relatively stable in the final months of 2012. A commercial real estate contact reports that therecovery from Sandy in Lower Manhattan has been slow, as a number of buildings in the flood zone remained out ofservice at year end. More broadly, leasing and sales activity across Manhattan were sluggish in November but picked upin December. Vacancy rates have been steady, while asking rents have edged up, led by brisk gains in Midtown South.Strong demand from the new media and advertising sectors and some pickup from legal services have offset weakdemand from the financial sector. Elsewhere in the region, vacancy rates were little changed in the fourth quarter, thoughasking rents fell noticeably in northern New Jersey.

Other Business Activity

Contacts in the manufacturing sector continue to report little or no growth in activity though they remain mildly optimisticabout the near-term outlook. Non-manufacturing contacts report some improvement in business conditions and havegrown increasingly optimistic about prospects for 2013. New York City area firms--both manufacturing firms and non-manufacturing firms--say that Sandy adversely affected revenues in November but that business was seen to be back on

track in December.

On balance, labor market conditions firmed in late 2012. While business contacts in the manufacturing sector report littleor no change in employment, contacts in other sectors note some pickup in hiring. A major New York City employmentagency specializing in office jobs said that while it is difficult to assess the labor market during the holiday season somecontinued softness in labor market conditions is apparent. In particular, financial sector hiring has remained sluggish, butyear-end bonuses are expected to be up moderately from a year ago. Much of the bonus pay typically distributed inJanuary was reportedly paid out in December in advance of higher tax rates.

Financial Developments

Small- to medium-sized banks report no change in demand for all loan types except commercial mortgages, where loandemand increased. Bankers report litt le change in demand for refinancing. The vast majority of respondents continue toreport that credit s tandards were unchanged across all categories. Respondents indicate a decrease in spreads of loanrates over the costs of funds for all loan categories--particularly in residential mortgages, where nearly three in fivebankers report lower spreads. Respondents also indicate a decrease in average deposit rates, on balance. Finally,bankers note declining delinquency rates in all loan categories--most notably in commercial mortgages, where well overhalf of those surveyed report lower delinquencies.

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Third District--Philadelphia

Aggregate business activity in the Third District has resumed the modest pace of growth that was evident prior to thedisruption by Hurricane Sandy during the previous Beige Book period. In particular, general retail sales, general services,and commercial real estate leasing recovered from temporarily mild growth rates to resume their previously modestgrowth rates. Sales of new and used autos accelerated to a moderate rate of growth, and residential real estate salesmaintained a strong year-over-year growth rate (from a relatively low base). Mild rates of growth are once again evident inmanufacturing, s taffing services, transportation services, and construction after many sectors suffered storm-relateddisruptions. Lending volumes at Third District banks also continued to experience slight growth, and credit quality hascontinued to improve. Overall, beach-going tourist areas are experiencing a typical s low season; however, some storm-damaged areas have lost significant business while some areas that escaped the damage are doing well. General pricelevels, as well as wages and home prices, were reported to have increased slightly overall. This remains similar to thelast Beige Book period, except for home prices, which had remained flat overall.

The overall outlook for at least modest growth is considerably more optimist ic relative to the views expressed in the last


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Beige Book. Contacts reported underlying strength in many sectors and expressed relief that part of the fiscal cliffdilemma has been resolved. Contacts from virtually all sectors reported greater expectations of future growth than duringour last survey period. Plans for future hiring were also significantly more expansive. Most contacts continued to expressconcerns over the impact from the recent payroll tax increase and the remaining potential budget cuts that might reduce

demand.

Manufacturing

Since the last Beige Book, Third District manufacturers have reported that orders and shipments have recovered to apace of slight growth. The mild pace can be partially attributed to seasonal trends. Comments from contacts focusedprimarily on small upticks, new product demand, and emerging markets, rather than on disappointing orders. Makers offood products, lumber and wood products, primary metals, fabricated metal products, and inst ruments have reportedgains since the last Beige Book. Lower activity was reported by makers of industrial machinery and electronicequipment.

Optimism among Third District manufacturers that business conditions will improve during the next six months hasrebounded strongly since the last Beige Book and is evident across nearly all sectors. Firms have also significantlyraised their overall expectations of future hiring and their plans for capital spending since the last Beige Book.

Retail

Third District retail sales recovered to a modest pace of growth for the holiday shopping season after the disruptions ofHurricane Sandy, according to retail contacts. Sales reports were mixed for mid-market department stores and somehome furnishing stores, which reported moderate early holiday sales gains followed by a lull, with slight declines from theprior year. High-end department s tores, family apparel stores, and outlet stores reported modest or moderate year-over-year sales throughout the holiday period. Some substantial mall tenants posted strong double-digit sales growth. Untilfinal sales are tallied, retail contacts relied on other early indicators to suggest that the final days of the holiday shoppingseason had grown modestly, or better. Traditional mall retailers continued to draw shoppers with promotions, while outletstores used fewer promotions than in prior years. Shopper surveys revealed concern over the consumers' futurepaychecks from the pending fiscal cliff negotiations.

Auto sales finished the year at a moderate pace of growth--combining the sector's slower pre-storm pace with a bump upfor replacement of cars damaged by the storm. In particular, New Jersey dealers reported st rong double-digit December

sales, capping a third consecut ive year of sales growth. The outlook among dealers remains posit ive; however, prospectsfor 2013 are not as strong as they were for 2012. "Consumers will feel a pinch" from the payroll tax increase andcontinued uncertainty about possible budget cuts.

Finance

Overall, loan volumes have continued to grow at a slight pace across Third District financial firms since the previousBeige Book. A flurry of year-end business lending kept banks busy facilitating tax-oriented business decisions involvingsales and liquidations, mergers and acquisitions, accelerated depreciation, and dividend payouts. Home mortgagerefinancing rates continued to remain high. In describing their competit ion as very aggressive, lenders expressedawareness of some potential portfolio risk , even while the credit quality of their borrowers continued to improve.Generally, financial institutions are expecting growth to continue, if not improve.


Residential builders reported one final surge of contract activity in November and then a downswing in December toconclude with slight year-over-year growth for the period. Despite facing erratic swings in demand through the year, ourcontacts reported very strong year-over-year growth for the entire year, which is more indicative of their own gains inmarket share than of the sector overall. Residential brokers reported robust year-over-year sales growth in November,

with steady year-end momentum. As with new home construction, existing home sales are growing from a low base.Builders and, to a greater extent, brokers are optimistic that recent growth will be sustained in 2013. As with other

sectors, contacts expressed concern that the fiscal cliff negotiations had been extended into their important first quarter.

Nonresidential real estate contacts reported renewed modest growth in overall leasing activity and continued slightgrowth in construction. Leasing activity finished the year with sustained double-digit growth. Notably, in the fourthquarter, contacts began "to see a re-emergence of leasing demand in lagging submarkets" (in the Greater Philadelphiametro area), including southern New Jersey. Stronger employment growth of professional services is c redited with muchof the demand; however, that demand is partially offset, as existing firms are consolidating and adjusting to more efficientoverall office spaces with smaller square footage per person. New construction of large industrial/warehouse space isplanned in 2013 in the HarrisburgLehigh Valley corridor on the heels of similar spaces built this year; no suchconstruction is anticipated in the southern New Jersey market area. New apartment/condominium projects continue toemerge throughout the Greater Philadelphia region, especially in Center City. Nonresidential real estate contacts retainan outlook of slow, steady growth.

Services

Third District service-sector firms have resumed a more modest pace of growth since the last Beige Book, according tocontacts in various sectors. Tourist areas along the Delaware and New Jersey shores are in various stages of recovery

from Hurricane Sandy. Atlantic City casinos reported significantly lower revenues in November (as much as $55 million)compared with 2011. Businesses and rental housing that serve the central and northern Jersey Shore communitiescontinued to lose some of the money they would have earned in the low season. Southern New Jersey and Delawarebeach communities are largely intact and operating normally. A Delaware beach hotel owner reported a strong Decemberfinish to the year, which was partly due to an extra holiday weekend. District staffing firms reported a mild pace of growthat year's end an improvement after the storm disruptions. Staffing contacts expect moderate growth in 2013 but arewatching their clients ' reactions to the serial fiscal cliff decisions. Defense-related firms received no relief from theuncertainty of budget cuts that has held their business plans in stasis for the past year. Overall, service-sector firmsexpressed more confidence in their expectat ions for growth in the near future.

Prices and Wages

Overall, price levels continued to increase s lightly, similar to the previous Beige Book. Cost factors among manufacturingfirms held steady, while the prices they received rose a lit tle. Tighter auto inventories generate a price environment thatfavors auto dealers over their customers. Homebuilders noted that rising commodity prices had added about 3 percent tothe cost of a new home in the past 90 days. In addition, roofing and siding contractors have lost crews to the JerseyShore repairs. Real estate contacts continued to report that house prices are firming up and that houses in somemarkets are receiving multiple offers. Rents are rising in most segments of the Philadelphia central business district


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market and for industrial space along the corridor from Carlisle, PA, to the Lehigh Valley. In other segments andgeographies, rents are flat or still falling. Contacts from all sectors continued to report that wages rose only a little, if atall. After a good year, two homebuilders reported issuing the first pay raises to their staffs in several years. Contacts didreport s trong growth in unemployment compensation and workers' compensation costs.

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Fourth District--Cleveland

Business activity in the Fourth District expanded at a modest pace during the past six weeks. Many of our contactsreported that their outlook for the new year is uncertain due to unresolved fiscal policy matters. Manufacturing orders andproduction were mainly flat or down slightly. Residential and nonresidential construction activity rose, with particularstrength noted in the multi-family segment. On balance, retailers described the holiday shopping season as solid. Salesof new and used motor vehicles increased on a year-over-year basis. Shale gas activity continued at a robust pace,though coal production trended lower. The slowdown in freight transport volume seen in September and October hasabated. Demand for business credit flattened out, whereas credit use by consumers picked up.

Hiring was sluggish across industry sectors. Staffing-firm representatives saw little change in the number of job openingsand placements during the past six weeks. Vacancies were found primarily in manufacturing and healthcare. Wagepressures are contained. Input prices were stable, apart from increases in construction materials.

Manufacturing

Reports from District factories indicated that new orders and production were flat or down slightly during the past sixweeks. Companies seeing increases were largely suppliers to the motor vehicle and energy industries. Compared to ayear ago, production activity was mixed. Steel producers and service centers described shipping volume as lower relativeto levels seen in the third quarter. Many of our contacts expect a slight weakening in business activity during the nextfew months due to seasonal factors and uncertainty surrounding the outcome of fiscal policy issues. Auto production atDistrict plants showed a moderate decline during November on a month-over-month basis. Relative to prior year levels,production was largely higher, especially for foreign nameplates.

Inventories are being reduced to become more aligned with demand. Manufacturers noted that capacity utilization has

fallen in recent weeks; however, rates were within or slightly below their normal range. Capital spending was largely ontrack for 2012. About one-third of our contacts plan on cutting back capital outlays during this year, and few producersanticipate expanding capacity . Raw material prices were either flat or t rended lower, while finished goods prices heldsteady. On balance, manufacturing payrolls were little changed. Less than half of our contacts expect to hire newworkers during 2013. Wage pressures are contained, and rising health insurance premiums remain a challenge.

Real Estate

Home builders reported that the upturn in sales of new single-family homes continued into December. Although aseasonal slowdown is expected, builders expressed confidence that sales will pick up again in the spring. Contractswere found mainly in the mid- to higher-price-point categories. The number of single and multi-family housing starts inDecember was significantly above year-ago levels. Lis t prices of new homes are increasing, which was att ributed toshrinking inventories and rising construction costs. Builders have cut back on discounting. Tight lending standards arestill seen as rest raining the effect of low interest rates for builders and home buyers. Multi-family developments areexpected to be the driving force behind new housing const ruction during the next one to two years.

Nonresidential contractors reported that business activity grew across market segments and was better than a year ago.Nonetheless, margins are still tight. Although inquiries are down, which is typical for this time of year, builders aresatisfied with their backlogs going into 2013. Project financing is available, but it is very time consuming to close a deal.As a result, some developers are turning away from banks and looking more to private lenders. Our contacts areoptimistic about near-term activity due to customers wanting to complete must-do projects, such as maintenance orproduction consolidation. However, there is a heightened level of uncertainly about the medium to long term. A generalcontractor reported that his customers are postponing the design phase of some of their projects. Other builders expecta slowing in health care construction, as providers evaluate the implementation of recently enacted laws.

Residential and nonresidential builders reported higher prices for drywall and lumber, due to rising demand and adeclining supply base. Contractors anticipate widespread price increases for building materials during the first quarter of2013. General contractors and subcontractors expect to increase their payrolls at a modest pace this year. There isconcern about the availability of highly ski lled trade workers and back-office personnel, and the potential impact ashortage of either could have on wage pressures.

Consumer Spending

Reports on the holiday shopping season were generally solid.Most retailers were encouraged by results during theThanksgiving weekend, and a majority said that sales during this holiday season were above those of a year ago.However, some contacts reported that sales figures fell below expectations for the entire season. Increased volume wasseen particularly in electronics and apparel. Sales for the first quarter of the new year are expected to t rend higher

relative to prior-year levels. Vendor and shelf prices held steady. Capital spending remains on target. A majority of ourcontacts reported that they plan to increase outlays slightly during 2013, particularly for warehousing, storeimprovements, and e-commerce. Little new hiring is anticipated, except for staffing new stores.

Year-to-date sales of new motor vehicles showed a moderate increase during November compared to the same timeperiod a year ago. Dealers reported that purchases of fuel-efficient cars, including hybrids and compact SUVs, are doingwell. New-vehicle inventories were described as adequate to s trong. A seasonal slowdown in sales is expected duringJanuary and February. Several dealers cited uncertainty over the resolution of fiscal policy issues as a factor that mayaffect auto sales in upcoming months. Year-to-date sales of used vehicles increased slightly during November, thoughinventories are still tight. Leasing continued to trend slightly higher, which should help to replenish the used-vehicleinventory by mid-2013. One dealer noted that the balance between leasing and traditional financing has returned tonormal. Some of our contacts reported that their employment level is lower than prior to the recession, and most do notexpect to increase payrolls during the next 6 to 12 months.

Banking

Demand for business credit was steady or down slightly since our last report. Some contacts cited a rise in the numberof applications for commercial real estate loans and refinancings, but on balance, demand was little changed across


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sectors and product categories. Several bankers noted that their loan-to-deposit ratio was much lower than desired. Onthe consumer side, reports indicated an increase in drawdowns on home equity lines of credit and rising credit cardreceivables, which were attributed to holiday shopping. A few bankers saw an increase in auto loans. Activity was strongin the residential mortgage market, with a large majority of applicants looking to refinance. Delinquency rates heldsteady or declined across consumer and commercial loan categories. Core deposits grew, with an ongoing transitionfrom time-deposit to transaction accounts. Little change in banking payrolls is expected in the near term.

Energy

Conventional oil and natural gas production was stable during the past couple of months. Shale gas activity continued ata robust pace: in West Virginia, well output at the end of 2011 was up 138 percent from the prior year, and during thefirst six months of 2012, well output across Pennsylvania rose by 42 percent compared to the previous 6 months. Ineastern Ohio, 187 wells have been drilled in the Utica shale in the past year, with 44 currently producing. Coal productionfor 2013 is expected to be flat relative to 2012 levels. Demand for thermal coal increased slightly due to colder weather

and a slowdown in switching from coal to gas by electric utilities. Demand for metallurgical coal in the U.S. held steady,but declined from offshore customers, particularly those in Europe. Falling prices for metallurgical coal have leveled off,while steam-coal prices were mixed. Capital expenditures by conventional drillers and coal producers are expected todecline during the first six months of 2013. Production equipment and material prices were flat across most categories.Apart from shale gas companies, lit tle hiring is antic ipated during the next 6 to 12 months.

Freight Transportation

Reports on freight transport indicate that shipping volume has improved since the start of November after an unexpecteddrop-off during the prior two months. Some contacts attributed the boost to rising demand coming from the retail sectorand areas affected by Hurricane Sandy. Freight executives were fairly positive in their outlook for 2013, with the caveatthat a resolution is reached on issues involving fiscal policy. Costs associated with truck maintenance held steady, whilediesel fuel prices fell. Reports on capital spending were mixed. Some freight haulers said that 2012 expendituresreached targeted levels. Others reported a postponement in purchasing equipment for replacement and expansion due toa sluggish economy and supply issues related to Class 8 trucks. Spending in 2013 is expected to be similar to 2012levels, and it will be mainly for replacement. Due to uncertainty about the economy, hiring plans for 2013 are tentative.Wage pressures were contained.

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Fifth District--Richmond

District economic activity generally grew at a modest pace in recent weeks. District manufacturing growth slowed, andretail salesflattened, with the exception of food and vehicle sales. Non-retail services providers reported stable tostronger demand, and tourism activity was at normal winter levels. Commercial and consumer lending varied by location,while the environment remained competitive. Residential real estate activity continued to improve; reports on commercialreal estate activity, however, were mixed. Agricultural conditions remained favorable. Oil and natural gas production heldsteady at high levels during the past six weeks, but coal production fell. Labor market conditions weakened somewhatsince our last report. Manufacturers' input prices were little changed, while finished goods prices rose at a slower rate,and the pace of wage growth remained moderate. Services providers' prices rose slightly faster and non-retail wagegrowth edged up. Retail price increases s lowed, and wages fell.

Manufacturing

District manufacturing continued to expand, but at a more modest pace since our last report. A furniture manufacturersaid that his business had improved through gains in market share and new product introductions, and that theimprovement should continue in 2013. A spokesperson for the technology industry reported that 2012 was expected to

be flat, but instead grew by ten to twelve percent. Another contact stated that, "Manufacturing is hanging in there,"noting that niche markets were doing best, but only i f they were not dependent on international demand. A producer oflumber products commented that sales volumes and orders dropped, in part because of Hurricane Sandy's impact ontheir customer base in the northeast. An electrical components manufacturer reported that business was "terrible,"adding that his only sales were to replace ruined equipment from Hurricane Sandy, and that export orders to Europe haddropped off. According to our latest survey, raw materials prices were relatively flat, while finished goods prices rose at aslightly slower pace.

Ports

The typical seasonal surge in import volumes shifted as a result of two major events. The first was the threat of an EastCoast port strike that has loomed since the September 2012 expiration of the master contract between the InternationalLongshoremen's Association and the U.S. Maritime Alliance. A number of shippers used alternative West Coast andCanadian ports ahead of the peak season to minimize disruptions to their businesses. Secondly, Hurricane Sandycaused diversions to Fifth District ports, boosting an already solid peak season. In addition, bulk fuel shipments thatwere diverted to the Northeast c reated "a pinch in supply" for companies located further south. Exports of resins forplastics, grains, forestry products and metal scrap were especially strong, with imports being led by beverages and retailgoods. Both exports and imports of auto-related products were robust.

Retail

Retail salesflattened, with the exception of food and vehicle sales, according to most merchants contacted since ourlast report. Several blamed the lackluster sales on the federal government's failure to resolve its fiscal issues. Mostretailers responding to a special poll indicated that they planned an equal amount of holiday discounting as a year ago.A West Vi rginia department store manager reported that sales were a little soft ahead of Christmas, while other retailersnoted little change. In contrast, many grocers noted an uptick in revenues. Although big-ticket sales were weak overall,car sales rose by double-digit percentages in recent weeks. Federal fiscal indecision also pushed sales of heavy trucks,construction equipment, and buses at the end of 2012, ahead of the possible expiration of bonus depreciation. Accordingto survey respondents, retail price growth slowed during the past month.

Services

Services firms reported stable to s tronger demand since our last report. An executive at a national freight trucking firmindicated that revenues flattened in the District, while another trucking company reported that demand slowed slightly,although that company was able to improve its margins. Demand strengthened at telecommunications and engineeringfirms, and a contact in Washington, D.C. remarked that law firms see regulatory practice as a growth industry. Duringthe week of Christmas and New Year's Day, the CDC reported that the flu had become widespread across the District .An executive at a North Carolina healthcare facility commented that the "flu season hit early and hard," more than


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doubling the average number of cases for that time of year. Non-retail services prices rose slightly faster in recent weeks,according to survey respondents.

Tourism activity was at normal winter levels in recent weeks, and rate changes were modest. In addition, a D.C. contactcommented that restaurant bookings were brisk for holiday meals and events. An executive at a Virginia resort area saidthat his rentals were filled up for the week from Christmas through New Year's Day. A source on the outer banks of NorthCarolina reported somewhat less tourism activity, compared to a year ago because of lingering road problems caused byHurricane Sandy.

Finance

Demand for both consumer and commercial loans varied across the District . A North Carolina lender noted thatmortgages for new purchases of homes declined, in part because of economic uncertainty. However, a second NorthCarolina lender said new financing is outpacing refinancing at his bank. According to another North Carolina banker, thehome mortgage business is improving and he indicated that refinancing has st rengthened in his region; in addition, anumber of lenders stated that the competition among lenders for refinancing business has been aggressive. Finally, abanking contact with several locations in the Dist rict reported that demand for consumer loans and mortgages had notchanged much. Bankers in Maryland and West Virginia reported that foreclosures have slowed. A West Virginia bankersaid that while overall credit quality has been very good, residential mortgage delinquencies have crept up s lightly, andthat demand for commercial credit had been steady at a relative high rate in recent weeks. Another West Virginia bankerremarked that his region's commercial and industrial loan demand had slowed because economic progress has been"lumpy." A banker in North Carolina reported that loan demand from businesses had remained weak despite lowerborrowing rates, owing in part to economic uncertainty .

Real Estate

Residential real estate activity continued to improve since our last report. A contact in South Carolina said that the realestate market was dynamic in the Charleston area and that demand and pricing were stronger than they had been in along time. A Realtor in the Washington, D.C. area expects a strong market through early 2013, as the combination ofrecord low inventory and low interest rates encourages new listings. A contact in West Virginia told us that home salesin his area have improved considerably and that prices were flat for the first time since the drop in values two years ago.Another source saw improvement in the "move up" market but litt le to no activity in the speculative market. He alsoremarked that the start-up market for housing remained flat and that the effect of student loans on credit scores was a

cloud over the mortgage market.

Reports were mixed on commercial real estate and construction markets in the District. While a few contacts reportedmodest improvement in activity since our last report, others noted flat activity or modest declines. A developer in theCarolinas said that absorption rates in the office sector tightened in the downtown Charlotte area, but vacancies insuburban areas remained elevated. In contrast, a real estate representative in Virginia indicated that office parkabsorption rates in the Roanoke suburbs were good, with ninety percent occupancy rates, which he attributed to newmedical facilities. However, he noted that vacancies in the downtown area were considerably higher. Most sources alsomentioned tightening of available office space, especially among Class A properties, due to lack of new construction. ACharlotte Realtor stated that leasing rates in the industrial sector continued to decline this year and noted little newdevelopment in the retail sector. Moreover, several realtors reported that rental rates were soft, noting that it was a"tenant's market." However, all contacts were in agreement that concessions were decreasing.

Agriculture and Natural Resources

Agricultural conditions remained favorable. Oil and natural gas production remained at high levels during the past s ixweeks. December was relatively mild across most of the District, with warmer than normal temperatures and significantprecipitation. Small grain conditions improved with the added moisture, as did pastures and hayfields.

Although conventional oil and natural gas production held steady at high levels, the rig count fell in West Virginia.Cushioning the fall, many companies continued to drill in order to get wells in place before permits expired. In contrast,coal production fell last year due to lower demand from domestic utilities and offshore customers, idling many mines.One coal producer attributed the depressed coal market to stricter regulations coupled with lower natural gas prices, aswell as a weaker economy both in the United States and in Europe.

Labor Markets

Conditions in labor markets weakened since our last report. There were several reports of soft demand for workers in partbecause businesses were reluctant to hire in the politically uncertain climate. Retail employment dropped sharply inrecent weeks, and several service sector contacts indicated that hiring decisions were in a holding pattern. Exceptionswere to fill vacated positions and to ease nursing shortages, and a Washington contact remarked that restaurants werepaying bonuses to attract managers. Sources continued to report difficulty finding qualified workers to fill vacancies,particularly in advanced manufacturing. Two Virginia temporary employment agencies noted increased demand for hightech and highly skilled workers. According to an ad hoc poll, less than half of the retailers who made seasonal hiresexpected to offer those employees a permanent posit ion after the holidays. Wage growth in manufacturing remainedmoderate, even among skil led workers, while average retail wages declined. In contrast, non-retail service sector wagescontinued to rise at a moderate pace.

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Sixth District--Atlanta

Reports from Sixth District business contacts indicated that economic activity expanded moderately in late Novemberand December, with most expecting continued modest growth in early 2013.

District merchants cited mildly positive holiday sales, while tourism contacts noted continued strength in both businessand leisure travel. Residential real estate contacts experienced ongoing modest sales growth for both new and existinghomes on a year-over-year basis, while commercial contacts described demand conditions as improving, especially inthe multifamily segment of the market. Manufacturers, on the other hand, noted a decline in orders and production.Reports from bankers indicated that loan demand had st rengthened, driven in large part by an increase in mortgagelending. Employment levels across the District expanded at a modest pace, while pricing pressures remained subdued.

Consumer Spending and Tourism

District contacts reported cautious optimism following a robust start to the holiday season. While sales were better than


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expected over the Thanksgiving weekend, reports covering the entire holiday season showed that total sales, althoughabove year-ago results, did not appear to meet expectations. Deep discounting was prevalent throughout the holidayseason. Auto sales remained robust and t ruck sales were somewhat positive with sales of replacement vehicles drivingthe growth for that segment.

Travel and tourism contacts continued to report strong activity. Hospitality contacts noted increases in visitation andspending in the final quarter of 2012. Lower gasoline prices boosted leisure travel. Business travel and attendance atmajor conventions also increased. International visitors continued to lift t ourism act ivity and advance reservations ofinternational travel have exceeded expectations. The outlook for 2013 remained positive with hospitality contacts

projecting increases in occupancy rates and revenue per available room.


The majority of District residential brokers reported that recent exis ting home sales were ahead of year earlier levels.Sales growth was strongest in Florida. Most brokers in the region again noted declining inventories and rising homeprices. Buyer traffic remained ahead of the year-ago level by most accounts. For 2013, most anticipate home salesgrowth will continue to improve slowly.

Reports from District homebuilders were a bit more positive than in our last report. Builders reported that recent newhome sales and construction act ivity were slightly ahead of year-earlier levels. The majority of builders continued toreport that new home inventories were below the year-ago level and prices were up slightly. Buyer interest remainedstrong but several builders continued to note difficulty securing development and construction financing. Despite thechallenges, the outlook for construction activity remained positive and builders anticipate new home sales in 2013 toexceed 2012 levels across many parts of the District.

Reports from District commercial contractors indicated that the pace of construction activity improved modestly from thethird to fourth quarter and was ahead of the previous year's performance. Apartment development was particularly strong.The pipeline for commercial construction at the end of the fourth quarter was greater than the year-ago level by mostaccounts. Most said that commercial construction development financing remained scarce. However, the outlook for2013 remained positive as most contacts expect commercial construction activity to be slightly ahead of 2012 levels.Commercial brokers indicated that most office, industrial, and retail markets in the District experienced modestly positiveabsorption rates. Overall, contacts continued to anticipate steady, but slow improvements in District commercial real

estate markets during 2013.

Manufacturing and Transportation

Manufacturing contacts in the region reported that new orders and production contracted in December. Finishedinventory levels also declined from the previous month. However, nearly half of manufacturing contacts expect productionto be higher than current levels over the next three-to-six months, up from just under one-third in November.

Trucking contacts reported a notable increase in tonnage in November, representing the first gain since July 2012, andoffsetting a drop in October's readings. Reports suggested that Hurricane Sandy affected both months' readings. A largetruck dealer reported it is expanding sales to include flatbed trailers in response to anticipated increased movement ofconstruction materials as a result of improvements in the housing sector. Railroad contacts reported an increase in totalcarloads in November over year-ago levels with the largest increases occurring in chemicals and agricultural productswhile declines were noted in coal, metallic ores, and metals. Concerns grew over low river levels that have led to delaysin Mississ ippi River barge traffic.

Banking and Finance

Many banking contacts indicated loan demand had increased and they've added lending specialists to deal with currentand anticipated demand. Competition for quality borrowers remained fierce and there was some indication that bankswere more willing to increase their tolerance for risk. Auto lending remained active and some depository institutionsnoted more loan growth in November and December. Low rates encouraged mortgage activity, and purchases accountedfor a larger share of mortgage loans than in the recent past. Community banks reported spending a larger portion of theirincome on compliance and remained concerned about increasing regulatory pressures.

Employment and Prices

Since the last report, payroll growth increased mildly across the District, though contacts said that uncertainty overfiscal policy and healthcare costs tempered hiring decisions. Aggregate gains in job growth across the District werefueled largely by strong job growth in Florida and Louisiana. Contacts in Florida's leisure and hospitality industry reportedmoderately improved hiring expectations, while the construct ion, retail, and energy sectors in Louisiana saw relativelyhealthy increases in employment in November and December.

Pricing pressures remained subdued, according to results from our December Business Inflation Expectations surveywhich indicated that unit costs were up 1.5 percent over the past 12 months, which is down from 1.7 percent inNovember. Margins improved somewhat in December, especially for retail contacts who reported being able to pass onslightly higher markups compared to the holiday season in 2011. Looking forward, year-ahead unit cost expectations ofbusinesses were 1.9 percent in December, moderating from 2.1 percent the month before. Businesses continued to cite

costs relating to tax policy, regulation, and healthcare as sources of uncertainty going into 2013.

Natural Resources and Agriculture

Planned investments, ranging from reserve development to increased refining and petrochemical operations to newpipeline infrastructure, continued to take place in the energy sector. For example, preparation for development of a largegas-to-liquids (GTL) and ethane cracker complex in Louisiana was announced, which is expected to increase theregion's production capacity for GTL diesel and ethylene. Separately, industry contacts maintained that higher marginsfor natural gas l iquids and other associated products continued to warrant ongoing drilling in natural gas wells, despitelow prices for natural gas. In the midst of an apparent surge in investment activity in the energy industry, Districtcontacts continued to cite a shortage of specialized skilled labor as a significant hurdle facing expansion plans goingforward.

Prices for corn, soybeans, beef, and poultry remained above year-ago levels, while the price for cotton was lower thanthis time last year. Dry conditions persisted in much of the District, although late December rains helped many areas inthe region.

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Seventh District--Chicago

Economic activity in the Seventh District continued to expand at a slow pace in late November and December. Manycontacts expected that growth in 2013 would match or outperform 2012, but some remained more cautious than others,citing the impact of continued uncertainty over federal fiscal policy on the near-term economic outlook. Consumerspending increased somewhat, while growth in business spending remained tepid. Growth in manufacturing productionwas again moderate. Residential construction continued to increase at a slow but steady pace, but nonresidentialconstruction remained weak. Credit conditions continued to improve gradually. Cost pressures eased some, and wagepressures remained moderate. Cattle and hog prices moved higher; while corn, soybean, and milk prices moved lower.

Consumer Spending

Consumer spending increased somewhat from the previous reporting period. Retailers noted that holiday sales wereslightly below expectations. Multiple retailers reported that store traffic volumes fluctuated more throughout the holiday

season than in recent years. Apparel and jewelry sales were strong, while sales of toys and electronics were more inline with expectations, and general merchandise sales were weaker. Auto sales in the District lagged the national pace,with several dealers indicating that lower consumer confidence hurt year-end sales. Some auto dealers also noted thatinventory levels were slightly high. However, dealers expected new car sales to be stronger in 2013 due to pent-upconsumer demand, easing credit conditions, and rising used vehicle prices.

Business Spending

Growth in business spending remained tepid in late November and December. Inventory investment was li ttle changedwhile spending on equipment and structures continued to slowly increase. Some contacts again noted a reluctance tospend given heightened uncertainty related to federal fiscal policy. Labor market conditions were unchanged. Hiring plansfor the coming year were limited. Retail employment increased with some seasonal hiring, but few significant full-timepost-holiday additions were expected. A recruiting firm noted that customers that are heavily dependent upongovernment spending were very cautious about increasing headcount amidst the fiscal c liff negotiations. Companies withexposures to Europe were likewise being more conservative in their hiring plans. However, contacts indicated that thereis still strong demand for talent in technology, engineering, accounting and finance, energy, and skilled manufacturingjobs. Manufacturers indicated a reluctance to reduce headcount despite the recent slowdown in activity, choosing to cutovertime hours instead in expectation of a rebound in production in the first quarter. In addition, some contacts are alsobeginning to limit hours for part-time workers to less than 30 hours in order to avoid the 30-hour (full-time employeestatus) rule related to the Affordable Care Act.

Construction and Real Estate

Construction and real estate activity was mixed in late November and December. Residential construction continued torise. However, homebuilders noted that new construction would stay moderate in many regional markets as long asexisting home prices remained well below new home prices. Existing home prices did edge up in some areas of theDistrict, and rental rates continued to rise. In addition, contacts reported that in many cases credit for homebuyersremained tight, slowing the pace of home sales. Demand for nonresidential construction remained weak, but someimprovement was noted in the light industrial and office markets. Several commercial real estate contacts observed thatuncertainty surrounding federal fiscal policy continues to weigh on structures spending in a number of market segments.However, commercial real estate conditions improved slightly. Vacancy rates continued to decrease; and while the paceof leasing and acquisition deals remained slow, it picked up slightly as financing became easier to obtain.

Manufacturing

Growth in manufacturing production continued to be moderate over the reporting period. Capacity utilization in the steelindustry increased slightly and service center inventories were noted to be at desi rable levels. Specialty metalmanufacturers reported a decline in quoting and new orders as customers continued to delay purchases until the last

minute. In contrast, a contact in the defense industry noted a substantial rebound in orders due to the two-month delayin sequestration. Contacts noted a slight pick-up in demand for construction equipment due to improvement in thehousing market, although demand from the public sector remained weak. The auto industry remained a source ofstrength for manufacturing. Auto suppliers reported strong orders through the end of the year, and many expected vehicleproduction to expand in 2013. Ac tivity in the energy industry appeared to slow. The lower price of natural gas, in part dueto abundant supply, has negatively affected coal mining. In addition, one contact noted the lower prices had also led to apause in shale gas production. However, contacts expected activity in the energy industry to rebound in early 2013.

Banking and Finance

Credit conditions continued to gradually ease over the reporting period. Credit spreads and financial market volatilityremained low, and asset quality continued to improve. Credit line utilization rose substantially, with contacts citing end-of-year factors such as tax planning and special dividends as reasons for the increase. Banking contacts also reportedmoderate growth in demand for small business loans, particularly from manufacturing industries such as machining andpackaging. Pricing for business loans changed little, while contacts cited some loosening of loan standards. Consumerloan demand, particularly for mortgage and auto loans, continued to increase. Contacts indicated, however, that lesshome refinancing act ivity was being processed than in the previous reporting period.

Prices and CostsCost pressures eased in late November and December. Most raw material prices moved lower, although there was somepressure on lumber and drywall prices and concerns remained around potential food and energy price increases. Incontrast, manufacturers supplying the defense industry said their customers were attempting to negotiate large pricedecreases; these contacts thought they could instead secure multi-year price agreements in exchange for moremoderate price reductions. A contact in the grocery industry indicated that they have been unable to fully pass on recentmeat and milk cost increases. More generally, retailers reported that discounting and promotions increased over theholiday shopping season. Wage pressures remained moderate, but nonwage costs increased. Contacts again citedhigher healthcare costs; however, a few noted that increases this year were less pronounced than a year ago. Severalcontacts also reported increasing 401(k) payouts and year-end bonuses.

Agriculture

Although drought conditions eased, depleted soil moisture remained a concern in much of the District . The low levels ofthe Miss issippi River hampered barge traffic moving both crops to market and inputs to farms. Crop operations tended tocome out ahead for the year if they had adequate insurance coverage, and most crop farmers saw their net worth grow.Uncertainty regarding the tax t reatment of capital expenditures led farmers to move up purchases of equipment and othercapital improvements into 2012. Corn and soybean prices slid during the reporting period. Milk prices decreased, whilecattle and hog prices increased. Of these agricultural products, only hog prices were below the levels of a year ago.


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Farmland values trended higher, with an extra spurt of farm sales at the end of 2012 in antic ipation of tax code changes.Cash rents for cropland increased as well for the upcoming season.

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Eighth District--St. Louis

The economy of the Eighth Dist rict has grown at a modest pace since our previous report. Recent reports of plannedactivity from service firms have been positive. In contrast, reports of planned activity from manufacturing firms have beennegative on net. Residential real estate market conditions have continued to improve, and commercial and industrial realestate conditions have also improved in some areas. Total lending at a sample of small and mid-sized District banksdecreased slightly from early September to mid-December. Agricultural conditions in the District have been mixed sinceour previous report.

Manufacturing and Other Business ActivityReports of plans for manufacturing activity have been negative on net since our previous report. Several manufacturingfirms reported plans to lay off workers and close plants in the Eighth Dist rict, while fewer manufacturing firms reportedplans to hire new workers or expand operations. Firms in HVAC equipment, electric components, food, and automobileparts manufacturing reported plans to lay off workers. In contrast, firms that manufacture small arms and medicaldevices reported plans to hire new workers and expand operations.

Reports of planned activity in the District 's service sector have been positive since our previous report. Firms in electricpower generation, food services, business support services, and information services announced plans to hire newemployees and construct new facilities. In contrast, firms in medical services and in financial services reported plans tolay off workers. Retail contacts in Louisville reported the opening of several new facilities, and an auto dealer group isexpanding operations in the Memphis area. Retailers in Memphis reported increased sales on an annual basis, and autodealers in Little Rock and Louisville also reported increased sales for the year.


Home sales increased throughout most of the Eighth Distric t on a year-over-year basis. Compared with the same periodin 2011, November 2012 year-to-date home sales w

beige book federal reserve jan 2013

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