Beige Book

July 26, 2006

Summary

Prepared at the Federal Reserve Bank of San Francisco based on information collected on or before July 17,

2006. This document summarizes comments received from businesses and other contacts outside the Federal

Reserve System and is not a representation of the views of Federal Reserve officials.

Reports from all twelve Federal Reserve Districts generally indicated continued economic

growth during June through mid-July, with numerous individual reports pointing to evidence

that the pace of growth has slowed. Several Districts characterized the overall pace of

economic growth as "moderate" or "modest," although San Francisco reported that its

economic expansion remained "solid" and Atlanta and St. Louis described overall conditions

as "mixed." The Philadelphia, Cleveland, Richmond, Chicago, Dallas, and San Francisco

reports each highlighted a decline in the overall rate of economic growth in their Districts.

Most reports on retail sales indicated slightly weaker conditions, on balance, than earlier in

the year. But tourist spending remained robust, albeit with evidence of slower growth in some

areas, and activity expanded for providers of nonfinancial services to businesses and

consumers. Reports from the manufacturing sector were strong, with significant gains in

output and sales, especially for durable goods. Producers in the agricultural and naturalresource sectors also saw strong demand, although some weather-related difficulties and

other supply constraints were noted. Activity in residential real estate markets cooled in most

parts of the country, but various Districts reported an ongoing pickup in demand for

commercial space. Among financial institutions, lending activity mirrored developments in

the economy more generally: commercial and industrial lending expanded further, while

most Districts reported a decline in residential mortgage lending and some noted reduced

demand for consumer loans.

Increases in wages and in prices of final goods and services remained modest on net. Upward

pressure from the elevated prices of energy and other inputs persisted; while this pressure

increased further in some cases, a few Districts noted a moderation in prices for some items.

Scattered reports from various Districts indicated an increase in manufacturers' and retailers'

ability to pass such cost increases on to final prices. More generally, however, Districts

reported that vigorous competition held price increases down, and some contacts noted

reliance on productivity increases to maintain profit margins in the face of rising input costs.

Labor markets tightened a bit further in most areas. Increases in base wages and salaries

generally remained moderate, but they were relatively rapid for workers with specialized

skills in a wide range of sectors.

Consumer Spending and Tourism

Many reports indicated that consumer spending on retail goods weakened slightly during the

survey period. Although most Districts reported gains in retail sales compared with a year

earlier, they generally characterized the pace of growth as modest or disappointing. Retail

sales were "mixed" or "varied" in Boston, New York, and Atlanta, "flat" in Richmond,

"cooling" in Dallas, and "below expectations" in Chicago and San Francisco.

Most Districts reported that sales gains for department stores and smaller retail

establishments were limited or below retailers' expectations. Sales were healthy for luxury

retailers but relatively weak among "big box" retailers and other low-price outlets. Cleveland

and Chicago reported that general retail spending was held down in part by high gas prices,

which have squeezed households' budgets and reduced the frequency of shopping trips.

In general, sales of automobiles and light trucks were flat to down. Sales remained healthier

for imported vehicles than for domestic makes despite the revival of sales incentives for the

latter, as high gas prices continued to nudge buyers towards fuel-efficient models. Inventories

reportedly were undesirably high for SUVs and light trucks in some areas.

Activity in the travel and tourism sector generally remained at high levels or increased

further, although a few reports indicated that the pace of growth has slowed. New York noted

that occupancy rates in Manhattan recently edged down from very high levels. Performance

was mixed in Richmond's tourism sector, and Kansas City and Minneapolis reported that

summer tourism activity has been at or only slightly above year-earlier levels. Atlanta

reported "cautious optimism" in the tourist trade and increased tourist traffic to Florida

destinations, while San Francisco reported that tourist activity increased further from very

high levels in Hawaii and other destinations throughout the West.

Nonfinancial Services

Activity in the nonfinancial services sectors generally expanded further, although the pace of

growth reportedly slowed in the Philadelphia and Richmond Districts. Providers of business

and professional services, such as advertising, accounting, management consulting, and

technology services, saw solid demand in general and increased activity in the Boston,

Richmond, and San Francisco Districts. Providers of permanent and temporary employee

placement services were quite active, with modest or better increases in hiring reported in the

New York, Philadelphia, Cleveland, Richmond, and Dallas Districts. Reports on the

health-care sector were mixed, with "brisk" activity reported by San Francisco but Richmond

noting that activity was "flat to lower."

Reports on the transportation sector suggested further increases in activity on net.

Philadelphia, Richmond, St. Louis, and Dallas pointed to recent expansion in rail freight and

trucking activity, and San Francisco reported strong demand for transportation services. By

contrast, Cleveland and Chicago noted slight declines in trucking tonnage and rail tonnage,

respectively, with the latter attributed to reduced shipments of construction materials.

Manufacturing

Reports on manufacturing activity indicated significant gains across most Districts during

June and July. The only slightly weak reports came from New York, where manufacturers

reported decelerating activity in July in the wake of a strong June, and St. Louis, where

manufacturing conditions were mixed.

Among products, demand was especially vigorous for various durable goods. Substantial

sales gains were reported for makers of electrical equipment and information technology

products such as semiconductors, along with further increases in orders and activity for

makers of commercial aircraft and products used for national defense. The reports also

pointed to a further rise in demand for makers of heavy equipment, machine tools, and steel,

offset in part by reduced demand for smaller equipment that is oriented towards residential

construction activity. Demand for building materials was mixed but generally positive.

Atlanta reported a drop in demand for concrete, but Chicago reported strong demand for

wallboard, and Richmond and Minneapolis noted further increases in the production of

fabricated metals. Among nondurable products, the reports indicated strong demand and

further growth for chemicals, plastics, textiles, and processed food.

The Cleveland, Chicago, and San Francisco Districts noted that capacity utilization was high

in various manufacturing sectors and increased a bit further in general. Looking ahead,

manufacturers in the Boston, Philadelphia, and Cleveland Districts reported plans to increase

their capital spending over the balance of the year, but in the Kansas City District

expectations for future capital spending remained low.

Real Estate and Construction

With only scattered exceptions, Districts reported slower activity in residential real estate

markets. For new and existing homes, available reports indicated that the pace of sales

declined and that the inventory of available homes and time on the market rose in most major

metropolitan areas nationwide. Slower sales activity has translated into more limited price

gains, and residential construction activity has fallen in most Districts as well.

The St. Louis and Dallas Districts were exceptions to the general slowdown in residential

market activity. In the St. Louis District, the pace of home sales was largely unchanged or up

slightly compared with a year earlier, although residential construction slowed there. Housing

markets have remained resilient in the Dallas District, where despite signs of cooling, "home

demand remains strong" and residential building activity has been "robust."

As home demand has slipped more generally, scattered reports indicated a strengthening in

demand for rental units. New York reported that the market for apartment rentals has been

tightening in Manhattan, and according to Atlanta slower condominium sales in Florida have

prompted owners to convert some units to rental property.

Slower activity on the residential side was offset in part by firmer activity on the commercial

side. Demand for commercial space was strong in general, and the market tightened further

in most Districts. Commercial construction activity was at high levels and increased further

in the Dallas, Atlanta, and Richmond Districts. By contrast, Chicago reported a modest

slowdown in commercial construction activity, and Kansas City noted that "commercial real

estate activity was mostly flat."

Builders in some areas faced moderate constraints on construction activity. High construction

costs reportedly were a restraining factor that delayed or caused the cancellation of some

building projects in the Cleveland, Chicago, and San Francisco Districts. Moreover, Atlanta

reported that some commercial building projects along the Gulf Coast have been put on hold

until late fall, after the current hurricane season is over.

Banking and Finance

Overall lending activity remained strong on net but growth slowed in most Districts, as

continued strength in business loans was offset by further weakening in loans to households.

On the business side, commercial and industrial lending generally was at high levels and rose

further in many Districts. The main exceptions were Richmond, where rising interest rates

reportedly contributed to a decline in commercial lending, and Atlanta, where commercial

lending "remained slow overall."

Loans to households weakened somewhat in most Districts, as ongoing declines in mortgage

lending were reinforced by slightly slower consumer lending in some areas. Most Districts

reported a reduction in the pace of mortgage lending, although St. Louis saw a slight

increase. While consumer lending was reported to be stable in a few Districts, it slowed

somewhat in the St. Louis, Kansas City, Dallas, and San Francisco Districts. New York noted

overall weakening in loan demand, with especially pronounced declines for consumer loans

and mortgages for commercial real estate. In most Districts, credit quality remained high

across all loan categories.

Agriculture and Natural Resources

Reports indicated further expansion of demand for most agricultural and natural-resource

products, but growing conditions for crops in some regions were hampered by dry weather.

Demand was strong for most crops and livestock products, and prices generally remained

firm even for products in ample supply. Dry conditions constrained growing in the Chicago,

Minneapolis, Dallas, and Atlanta Districts, holding yields on corn, cotton, and other crops

below normal levels. Dry conditions also caused pasture deterioration in the St. Louis,

Kansas City, and Dallas Districts, increasing operating costs for livestock producers and

prompting some to reduce or liquidate herds. By contrast, dry weather contributed to healthy

crop conditions for corn, cotton, and other items in the St. Louis District. High input prices

reportedly squeezed agricultural profit margins in some areas, with Chicago noting an

increase in farmers' reliance on operating loans and Kansas City reporting an expected drop

in farm incomes this year.

Activity was robust in the natural-resources sector. Dallas, Atlanta, Kansas City, and

Minneapolis reported further increases in extraction activities for oil and natural gas.

Demand for labor and equipment was strong, and some producers reported labor shortages

and difficulties obtaining needed materials and equipment. Producers of natural gas

continued to operate at high levels, although Dallas and San Francisco reported that

inventories have risen substantially, causing prices to decline.

Prices and Wages

Increases in prices of final goods and services generally remained modest, despite the

pressures from high prices for selected inputs and further increases for some. Manufacturers'

and retailers' ability to pass cost increases on to final prices varied. Providers of

transportation services have been able to apply fuel surcharges, significantly increasing the

price of their services in some areas over the past year. In addition, Atlanta noted rising

prices charged by various service providers, and Kansas City reported an increase in the

percentage of manufacturers reporting higher prices on finished goods. Other reports

indicated more limited pricing power and smaller increases in final prices. Richmond

reported that retail prices rose at a slower pace in recent weeks, and Kansas City reported that

recent and planned increases in retail prices were unchanged from the previous survey

period. Dallas noted that weaker demand of late reduced firms' ability to raise prices in some

industries.

District reports indicated that labor markets were tight in general and tightened a bit further

in most areas. Increases in base wages and salaries generally remained moderate overall, with

scattered indications of faster growth for some workers. San Francisco noted that numerical

reports on wage increases generally were in the range of 3 to 4 percent. In the Kansas City

District, the fraction of firms reporting "above-normal" wage increases edged up, and Dallas

reported significant pay increases for workers employed through temporary services firms.

Wage increases remained relatively rapid for skilled workers in many areas, including

managerial and professional employees and those with specialized occupational skills in a

variety of industries. Moreover, New York reported that the market for recent college

graduates has tightened, with starting salaries up 7 percent over the past year in that city.

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First District--Boston

Many segments of the First District economy continue to grow. Rising numbers of

manufacturers and business services providers are increasing their selling prices, and some

now report that competition for high-end workers is exerting upward pay pressures. Retailers

indicate that their ability to raise prices remains spotty. Residential real estate sales volumes

are slowing, and selling prices are flat to slightly down from a year earlier. With the

exception of real estate and some consumer-oriented contacts, companies have a mostly

positive revenue outlook for the remainder of 2006. However, many retailers and

manufacturers mention downside risks related to rising business costs or eroding consumer

purchasing power.

Retail

First District retailers cite mixed results in the second quarter. An automobile dealers

association reports that sales have decreased an estimated 20 percent from year-ago levels. A

lumber retailer notes that sales have been slow and below plan for the quarter, possibly due to

a weaker housing market and higher interest rates. However, a hardware chain reports that

same-store sales are up over 6 percent compared to last year, largely due to favorable weather

conditions and some internal restructuring. A discount furniture retailer notes that sales are

geographically mixed from flat to positive, while a provider of surplus merchandise is seeing

"very, very good" sales, up 7 percent over year-ago levels. A contact in the apparel industry

reported same-store sales up 4 percent for both May and June, and expects sales growth to

remain positive.

The majority of contacts observe higher-than-expected inventories, although one retailer

reports keeping inventory levels very lean to maximize purchasing flexibility. A number of

contacts report vendor price increases for petroleum-based products, but only a few have

been able to pass on these increases to the consumer. Employment levels are mostly steady,

with increases occurring only with the openings of new stores. Capital spending reports are

mixed.

While many First District retailers are optimistic about the next few months, almost all

express concern over rising energy costs and the effects of inflation and higher interest rates

on consumer budgets.

Manufacturing and Related Services

First District manufacturers and related services providers generally report that second

quarter and early third quarter revenues, orders, and production levels were higher than a

year ago. Among the strong performers are firms producing pharmaceuticals,

semiconductors, and aircraft, mining, and power equipment. Various manufacturers report

robust sales to overseas customers, particularly in Asia and the Middle East. Several

companies indicate that they are straining to keep up with increases in demand.

Almost all of the respondents mention that inputs cost substantially more than a year ago,

and some are expecting continued upward movements. Contacts point to copper and other

metals, oil derivatives, packaging, inputs from China, energy, and fuel surcharges as sources

of cost pressure, but several mention that natural gas prices have come in below expectations.

Almost all of the manufacturers contacted have raised their selling prices this year or plan to

do so in the current quarter. The remaining contacts report that their selling prices have

firmed after being under downward pressure. Many contacts indicate that their customers are

accepting price hikes. For example, a couple of companies say they are factoring in the full

amount of input cost increases when entering new contracts. One manufacturer reports that it

is having greater success passing along energy price increases than earlier in the year, and

another firm says its pricing capability is stronger than it has been for a couple of years. The

companies reporting customer resistance to price hikes are mostly in chemicals and selected

consumer goods industries.

Most manufacturers report that their U.S. headcounts are stable or edging downward. Base

pay increases for 2006 mostly remain in the range of 3 percent to 4 percent, but some

companies indicate growing pressures for higher raises, especially for professionals.

Employers continue to report that openings in finance, accounting, supply chain

management, and certain technical jobs are hard to fill. Most manufacturing respondents

expect their domestic capital spending to be flat or increasing this year. The higher spending

is chiefly for product development and reconfiguration of operations.

Most manufacturers have a positive revenue forecast for the remainder of 2006. Their

concerns center around the impacts of high energy costs and rising interest rates either on

their own costs or on the economy at large.

Selected Business Services

The majority of First District advertising and management consulting contacts note that

business has been steady, and they report modest revenue gains in the second quarter of 2006

compared to a year ago. Respondents note that demand for IT consulting services is robust,

and the financial services, telecom, and aviation and aerospace industries have increased their

demand for consulting services. Advertisers say that the New England banking industry has

been a strong purchaser of their services.

Contacts note that travel expenses continue to climb and the prices for market data have

increased. The ability of business services firms to raise prices has been mixed; some firms

say that their selling prices are increasing a little with limited or no push-back, while those

that are keeping pricing stable report that they face less downward price pressure than

previously.

A majority of New England consulting contacts plan to increase their headcounts in 2006.

The labor market for experienced consultants continues to tighten, and a few contacted

companies note that they are beginning to experience difficulties filling vacancies in fields

such as finance and sales. Advertising and marketing firms report no plans to change

headcounts. Wage increases at business services companies range from 2 percent to 10

percent, with consulting firms reporting raises on the higher end of the range. One consulting

contact reports that people are seeing low- to mid-single digit increases on average, but their

"stars," who have an increasing number of outside offers, are asking for--and getting-low-double digit raises.

Most respondents expect revenue growth to remain the same or accelerate slightly over the

remainder of 2006, although a few contacts caution that they have limited visibility beyond

the third quarter.

Residential Real Estate

Across the First District, the pace of residential sales continues to slow and market times

continue to increase. These slower sales, combined with increased listings, have led to

inventory increases. At the end of May, Massachusetts had 30 percent more units listed than

a year ago, pushing the supply to around 11 months overall. Contacts indicate that inventory

has decreased more recently, though data are not yet available.

Contacts attribute slower regional sales to increasing mortgage interest rates, a lack of both

buyer and seller urgency, and unwillingness on the part of sellers to reduce asking prices.

Certain areas of New England have seen downward movement in sales prices. In

Massachusetts, median single-family home prices declined 0.3 percent and 1.2 percent in

April and May, respectively, compared to the year before. Median condominium prices

declined 2.5 percent year-on-year in April but increased 2.5 percent in May.

Contacts project modest price decreases for the year in single family homes in Massachusetts

and no price appreciation for condominiums. They also believe the sales pace will continue

to slow. Despite softening sales and cooling prices, contacts remark that sales volume in 2006

is still slated to be one of the highest on record.

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Second District--New York

The Second District's economy has continued to grow at a moderate pace since the last

report, though there are further signs of softening in housing. Businesses report that increases

in input prices continue to be widespread but have not intensified, and there are no signs of

any broad-based acceleration in consumer prices. Contacts indicate further tightening in the

labor market since the last report. On balance, retailers report that sales were mixed but close

to plan in June and early July; tourism activity has receded slightly since the last report but

remains strong. Manufacturers report some deceleration in activity in recent weeks but are

increasingly optimistic in their outlook for the second half of the year. The home purchase

market showed continued signs of softening in June, but Manhattan's apartment rental market

reportedly strengthened further. Office markets across the New York City metro area were

mixed but, on balance, stronger in the second quarter. Finally, bankers report further

widespread weakening in loan demand, some tightening in credit standards, and little change

in delinquency rates.

Consumer Spending

Retailers report mixed results for June and early July, with same-store sales ranging from flat

to up 3 percent from a year ago. Retail contacts continue to note relative weakness in demand

for lower-end merchandise lines. While furniture sales continue to lag, one large chain notes

a pickup in housewares and home textiles. There are also reports of some weakening in

restaurant business. Overall, retailers report that inventories are at favorable levels and that

selling prices continue to be steady.

Tourism activity, though still quite strong, has shown signs of slowing slightly since the last

report. Manhattan hotels report strong business for May and June: occupancy rates edged

down from their near-record levels of a year earlier, as well as April, though they were still

close to 90 percent; room rates were up nearly 14 percent from a year earlier. Hotel

occupancy rates in the Buffalo-Niagara Falls area were reported to be up strongly from a year

earlier in May, but advance bookings are reported to have weakened. A contact in upstate

New York reports that attendance at State parks has been buoyed by people vacationing

closer to home.

Consumer confidence in the region showed signs of improving in June. The Conference

Board survey of Middle Atlantic residents showed consumer confidence rebounding, after

slipping in April and May; moreover, perceptions of current conditions were more positive

than in almost five years. Similarly, Siena College's survey of New York State residents

shows confidence rising in June, particularly upstate.

Construction and Real Estate

Further slackening is noted in the region's housing market since the last report, though

Manhattan's rental market has continued to firm. New Jersey homebuilders report that the

inventory of new and existing homes on the market increased further in the second quarter,

but a bit less rapidly than in the first. A disproportionate part of the inventory accumulation is

at the middle to high end of the market ($500,000 and over). Builders are also seeing that

homes they have recently sold to investors looking to "flip" the properties are remaining on

the market longer, exerting increased competitive pressure. Builders have recently begun to

reduce selling prices on some units.

A major appraisal firm reports that sales of Manhattan co-ops and condos were down more

than 10 percent from a year earlier in the second quarter, while prices were up roughly 5

percent. Separately, a major real estate firm notes that sales of Manhattan's co-ops and

condos slowed sharply in June, following fairly brisk business in May, while selling prices

continue to run a bit higher than a year ago. Both contacts note that the inventory of unsold

apartments has increased sharply and steadily over the past year, driven largely by new

development. In contrast, a major Manhattan real estate agency notes further tightening in the

rental market in June and early July: the inventory of available units continues to decline, and

rents are up across the board, with gains of more than 10 percent in certain neighborhoods.

Office markets across the New York City area were mixed to stronger in the second quarter.

Throughout Manhattan and in Fairfield County (Ct.), office availability rates fell to their

lowest levels in roughly five years, while asking rents showed sturdy increases of 6 percent

or more from a year earlier. However, vacancy rates rose in Long Island and edged up in

Westchester and northern and central New Jersey; asking rents in these areas are little

changed from a year ago.

Other Business Activity

A securities industry contact notes exceptionally strong conditions in the second quarter,

driven by strong growth in trading revenue and mergers & acquisitions; however, the outlook

is more mixed, as recent levels are not seen as sustainable. A major New York City

employment agency, specializing in office jobs, reports a pickup in business in June,

compared with April and May, led by continued strong business from the financial sector and

a recent spate of hiring from executive search firms expanding their own staffs. Fewer recent

college graduates are reported to be looking for work, at this point in the season, than in

recent years, reflecting the tight labor market. Salaries are said to be up 7 percent from a year

ago for recent college graduates and up over 10 percent for experienced workers at

middle-range positions.

June surveys of purchasing managers in the Rochester and Buffalo areas indicate continued

strong improvement in business conditions, along with widespread but steady price

pressures. In our more recent July Empire State Manufacturing Survey, respondents report

decelerating business activity, following a strong June, but firms express increased optimism

about the near-term outlook. In general, manufacturers do not report significant disruptive

effects of the flooding in late June, though one central New York firm notes that, due to some

disruptions, it will be running overtime through the end of July. There is no indication that

New Jersey's government shutdown, during the first week of July, had a significant impact on

business activity in the northern (2nd District) part of the state.

Financial Developments

Small to medium-sized banks in the District report decreased demand for all types of loans-particularly consumer loans and commercial mortgages, where more than four times as many

bankers report decreases as increases. Bankers note tightened credit standards for consumer

loans and commercial mortgages, while credit standards for residential mortgages and

commercial and industrial loans remained unchanged. A large majority of bankers continue

to report increased rates on both loans and deposits. Finally, delinquency rates were

unchanged across all loan categories except commercial and industrial loans, for which 20

percent indicate that delinquencies are down, while 6 percent say they are up.

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Third District--Philadelphia

Overall economic activity in the Third District increased in early July, although the rate of

growth appeared to be easing. The manufacturing sector improved but not as much as in

June. Retail sales of general merchandise rose, but auto sales were flat. Bank lending

increased, although demand for residential mortgages continued to fade. Service industry

activity rose, but the pace of growth has slowed somewhat from the first half of the year.

Third District business contacts generally expect business activity in the region to expand in

the second half of the year, but not quite as strongly as in the first half. Manufacturers expect

further gains, but not a strong advance. Retailers anticipate sales to continue growing near the

current rate, but they say it is difficult to predict how successful the fall season will be. Auto

dealers expect sales to remain sluggish through the rest of the year despite the reintroduction

of manufacturers' incentives. Banks anticipate a moderate increase in overall lending, but

they forecast a further decline in mortgage lending for home purchases. Service-sector firms

expect business to continue to rise in the second half of the year, but not as rapidly as in the

first half.

Manufacturing

Manufacturing activity increased in early July, but the upward momentum was slight. Around

one-half of the Third District manufacturing companies contacted for this report said that

shipments and new orders in the first weeks of July were level with June; only a few more

firms reported increases than reported decreases. On balance, area manufacturers reported a

decline in order backlogs and a shortening in delivery times. Demand increased in July for

metals and industrial materials but slipped for many other manufactured products. Firms

supplying the residential construction industry noted sharp drops in orders.

Overall, manufacturers expect business conditions to improve in the second half of the year,

but they do not anticipate a strong advance. Somewhat fewer than half of the firms contacted

in early July expect their shipments and orders to increase during the next six months; about

one-fourth expect decreases. On balance, capital spending plans among District

manufacturers call for modest increases in expenditures.

Retail

Most of the retailers contacted for this report indicated that sales in June and early July

increased from the same period a year ago. The increases varied among stores. Stores

specializing in luxury items posted stronger annual gains than stores specializing in

low-priced goods. Among types of merchandise, apparel sales were relatively strong, boosted

in part by clearance sales. Some stores reported better customer traffic than usual for this

time of year, as did some restaurants. Third District retailers expect sales to be seasonally

slow until the back-to-school shopping period gets under way. Although they are uncertain

about the prospects for fall, they do not see any signs that sales growth will slip from the

recent pace.

Auto sales in the region were virtually steady in June and early July but below the level

recorded in the same period a year ago. Dealers said domestic manufacturers' incentives and

discounts were propping up their sales, but foreign models continued to have better

year-to-year sales comparisons than domestic models. Inventories were above desired levels

but appeared to be steady. Despite support from manufacturers' incentives, dealers in the

region expect sales to be sluggish for the rest of the year.

Finance

The volume of loans outstanding at Third District banks rose modestly in June and early July,

according to commercial bank lending officers contacted for this report. Commercial and

industrial lending increased for most banks. Credit card lending expanded, but other types of

personal lending have been virtually flat. Demand for residential purchase mortgages eased.

Deposit interest rates were rising at commercial banks amid competition among financial

institutions within the region as well as from those outside the region.

Bankers in the District expect continued growth in business and consumer lending in the

months ahead, although they believe the rate of growth is slackening. They also expect gains

in credit card lending, but they expect little if any growth in other types of personal lending.

They expect residential mortgage demand to decline further.

Services

Most of the Third District service firms contacted in early July reported that activity was

increasing, but for many firms growth has moderated from the pace set earlier in the year.

Business services firms generally indicated that many of their client firms were attempting to

limit growth in the use of outside services as they deal with rising energy and commodity

prices. Trucking firms reported continuing increases in activity. They noted that

transportation capacity in general is tight, and that demand for quick delivery of time-critical

shipments has not been diminished by rising charges. Employment agencies and temporary

help firms reported that demand for workers has been rising at a nearly steady pace. Servicesector firms expect business to continue to advance, but they expect growth to be slower in

the second half of the year than it was in the first half.

Prices and Wages

Business firms in the Third District reported continuing increases in the costs of raw

materials and intermediate goods. Manufacturers noted recent increases in prices for lumber,

metals, petroleum-based products, and chemicals. Firms in all industries indicated that high

energy prices continued to contribute to elevated operating expenses. Some firms have

postponed maintenance and improvement projects, where possible, in response to higher than

budgeted costs.

Employers in a range of industries reported that labor markets remain tight. Most of the firms

contacted for this report indicated that wage and salary levels have been edging up.

Employers said they have been having difficulty filling certain professional and managerial

positions, and they have raised salaries more for these positions than for others.

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Fourth District--Cleveland

The District's economy continued to expand in June and early July, but showed signs that

growth was beginning to moderate. Most manufacturers reported steady production in the six

weeks ending in early July. Retailers, however, reported a softening in sales, attributing this

to high gasoline prices and rising interest rates. While commercial building continued to

show modest growth, residential construction has weakened since May. Demand for trucking

and shipping services continued to be strong and broad-based. And while commercial and

consumer borrowing generally remained steady, there were reports of some deterioration in

consumer credit demand.

In general, hiring continued to be limited throughout the District. Staffing-services

companies reported that job openings increased only modestly in June. However, demand is

still high for healthcare and insurance industry workers. Only a few manufacturers were

concerned about wage pressures and this was mainly due to expiring labor contracts. Almost

all contacts reported some increase in input costs, especially for petroleum products and

metals. Commercial builders, nondurable goods manufacturers, and trucking firms frequently

reported that they could pass these costs along to their consumers relatively easily. Retailers,

however, reported that they were generally holding prices steady.

Manufacturing

For the six weeks through early July, the District's durable good producers generally reported

steady production, at levels above those of this time last year. Among important District

industries, steel producers continued to see steady demand from an array of industry

segments, including the energy, heavy truck, aerospace, and commercial construction sectors.

Steel shipments to the automotive market, however, were generally weak. District auto

production appeared to echo this, with production weakening recently, as well as on a

year-over-year basis. Most durable goods producers expected current levels of activity to

continue through the end of the year. Most also reported that they had little idle capacity, and

accordingly planned to increase their investment spending. Hiring was widely reported, with

many firms indicating an intention to continue to hire through the rest of this year.

Production at the District's nondurable goods facilities also appeared to be steady in the six

weeks through early July, but only above year-ago levels for half of the companies contacted.

About half also expected activity to improve through the remainder of 2006. However, few

firms planned to increase their investment spending in the coming months, and few planned

any staff additions.

Among all manufacturers, wage pressures were not widespread, though increases in materials

costs were widely reported, in particular for some petroleum-based products and copper.

Nondurable goods producers generally sought price increases more frequently than their

durable-goods producing counterparts.

Retail

Sales at District retailers were soft through the six weeks ending in early July. Most contacts

attributed weaker sales to high gasoline prices and rising interest rates. Among apparel

retailers, sales were reported to be on-plan, but less than a year ago. Contacts were rather

pessimistic or uncertain about activity in the near future. Sales at discount stores were soft

and below-plan in June. These contacts reported that shopping traffic slowed and that lowerincome customers were making fewer purchases. Finally, sales at drug stores were mixed.

Almost all retailers noted that utilities, shipping, and construction costs were up dramatically

on a year-over-year basis; nevertheless, product prices were holding steady. Most retailers

noted no unusual activity in hiring, however, one contact cited a slow-down due to business

uncertainty.

Regarding sales of new vehicles, foreign nameplates continued to outsell their domestic

counterparts. Used vehicle sales remained relatively steady. All dealers reported that

showroom traffic was down and that, to a significant extent, sales continued to be dependent

importantly on incentives.

Construction

New home sales since late May continued to weaken, with sales down on a year-over-year

basis. Traffic was also less than at this time last year. In addition, some builders reported an

increase in cancellations, with the inability of individuals to sell their own homes offered as a

partial explanation. Under the circumstances, many contractors have radically reduced their

speculative building. In general, builders' backlogs have also fallen from year-ago levels.

Regarding materials costs, most builders thought that overall costs changed little in recent

weeks, though several reported rising copper and petroleum-product costs. Several contacts

also reported trimming their staffs, while subcontractors are reportedly readily available.

About half of those contacted noted that they had increased incentives or discounts recently.

The District's commercial contractors reported that the economic environment remained

better than at this time last year, and that customer inquiries continued to be strong. However,

some contractors reported a softening in sales since the end of May. Still, for most firms,

backlogs remained relatively strong. Among the segments where sales remained robust were

manufacturing, health care, and education. Input cost increases were widely reported, notably

for petroleum-products and copper. Most builders reported that they can easily pass these

price increases through to their new customers, but aren't generally able to adjust current

contracts with existing customers. Few firms changed their staff sizes in recent weeks.

Banking

At District banks, both commercial and consumer borrowing remained relatively steady since

the end of May. However, some smaller institutions noted a further deterioration in consumer

credit demand. A contact at a large institution reported an increase in the demand for

commercial credit lines; however, he indicated that this had yet to translate into additional

borrowing. This was interpreted as a possible sign of underlying uncertainty. Credit quality

continued to be strong, though there were some reports of rising delinquencies. Finally, in

general, growth in core deposits was described as steady.

Transportation

Demand for trucking and shipping services remained strong through early July, although

most contacts noted a small decrease in tonnage compared to a year ago. High fuel costs

remain a concern. However, trucking companies continue to easily pass on these costs to

end-users using surcharges. As previously reported, carriers are coping with high driver

turnover and shortages. Nevertheless, most contacts reported little movement in wages.

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Fifth District--Richmond

District economic activity generally grew more slowly since our last report, with only

manufacturing output and temporary hiring showing much life in recent weeks. Retail sales

were flat over the period for the most part, with big-ticket sales softening and domestic

automobile inventories increasing. Revenues at services firms grew, but at a slower pace.

Factory output bounced up in early July after holding steady in June, and new orders firmed

as well. Residential real estate markets continued to cool and commercial activity took a

breather. District hiring was mixed, with the pace of activity softer in retail, unchanged at

services firms and stronger in manufacturing. Prices continued to be pressured by

pass-throughs of higher raw materials prices, but there were hints that the pace could be

lessening. In agriculture, widespread rainfall in early July helped stressed crops and pastures.

Retail

District retailers reported that on balance, their sales flattened in recent weeks. A sporting

goods supplier in West Virginia said that sales growth was unchanged since our last report. A

contact at a department store in Virginia Beach, Va., reported flat sales in recent weeks, and

retailers in West Virginia and central Maryland told us that apparel sales declined. A

domestic automobile dealer in the Tidewater, Va., area also reported lower sales, adding that

there was an "overload of cars right now." Another dealer in the DC beltway region told us

that his customer traffic declined by as much as 20 percent in recent weeks. Contacts at

building materials stores said demand generally softened as interest rates and gasoline prices

rose. In contrast, a building supply store manager in central Virginia said that his sales picked

up in the first half of July. Retail prices and employment in the District grew at a slower pace

in recent weeks.

Services

Revenues at District services firms generally increased more slowly in recent weeks,

according to contacts. District healthcare facilities reported that demand for their services

was flat to lower, although several hospitals in North Carolina reported strengthening

demand. Administrative, professional, scientific, and technical firms characterized revenues

growth as unchanged, though a few reported a pick-up since our last report. Freight

companies said revenues rose at a faster pace in recent weeks. Price growth in the sector

slowed since our last report and the pace of hiring was unchanged.

Manufacturing

Manufacturing activity was nearly flat in June but picked up steam in early July.

Manufacturers told us that shipments, new orders and employment expanded at a solid clip in

the past two weeks. Manufacturers in the chemicals, fabricated metals, furniture, plastics and

textiles industries reported increased production. A textile manufacturer in North Carolina

told us that while their shipments were strong, they were experiencing a profit squeeze

because of rising raw materials prices. In addition, a chemical producer in North Carolina

noted that customer demand remained strong and that inflationary pressures were increasing.

Despite continued concerns about high raw materials prices, most contacts indicated that

prices of raw materials increased less quickly since our last report.

Finance

Bankers in the Fifth District said that loan demand grew more slowly in late June and early

July. A mortgage banker in Charlotte, N.C., said that high gas prices "have really reduced

discretionary spending by consumers," contributing to lower demand for mortgages. Hot

coastal housing markets showed signs of deceleration, leading a Charleston, S.C., mortgage

lender to remark that "this softening…will finally bring some normalcy back to our

business." Lending for commercial loans also softened. A Charleston, W.V., lender reported

that businesses were putting off capital expenditures as long as possible due to higher interest

rates.

Real Estate

District residential real estate agents continued to report a general slowdown in home sales.

An agent in Washington, D.C., said sales in his market had dropped sharply compared to last

year, and he described recent activity as "the worst he had seen in 8 years." In contrast, a

Northern Virginia agent described sales levels as "adjusting back to a more normal state."

Several agents reported that houses were staying on the market longer and that inventory

continued to build. Consistent with slowing sales activity, home price declines were more

widespread across the District. Several contacts commented that higher interest rates were a

factor in slower sales. Although low- to middle-priced houses remained the best sellers,

agents in a few areas reported that higher-priced homes had picked up recently.

Commercial real estate agents reported slowing leasing activity, although several noted

increases in the office and industrial segments of the market. A contact in Richmond, Va.,

said that high commercial rents in northern Virginia had caused a number of companies to

relocate to the Richmond area, boosting demand there. Little change was reported in overall

vacancy and rental rates, however. Commercial real estate agents reported a small increase in

new construction. An agent in Raleigh, N.C., noted that most construction coming to market

is "already pre-leased and therefore will not affect vacancy rates."

Tourism

Tourist activity was mixed since our last report. Hoteliers along the coast reported solid

bookings during the weeks surrounding the July 4th holiday--facilitated by good weather and

more aggressive discount packages. Tourism at mountain resorts in Virginia and West

Virginia was mixed, however. While a contact at a mountain resort in Virginia said holiday

bookings were much stronger than a year ago, a counterpart at a West Virginia resort

indicated that his bookings were weaker.

Temporary Employment

Temporary employment firms in the District continued to report generally strong demand for

workers since our last report. An agent in the Washington, D.C., area told us that the demand

for workers had remained at a solid level. He said that a lack of skilled workers was a

growing problem and would become a bigger problem if the economy continued to grow on

pace. Agents in Richmond, Va., and Raleigh, N.C., reported ongoing demand for directplacement hires; the Raleigh agent expressed optimism that continued strengthening in his

local economy would continue to underpin demand for workers in coming months. Computer

skills, sales and administrative support skills remained highly sought by employers.

Agriculture

Wetter-than-normal weather brought much needed rainfall to crops and pastures in the Fifth

District in late June and early July. While the Carolinas remained generally dry, the summer

showers greatly improved soil moisture conditions and yield prospects for corn and

soybeans. In addition, the rainfall revived pasturelands across much of the District. Heavy

rains in Maryland and Virginia, however, caused some localized flooding which damaged

crops in low-lying areas. On a brighter note, small grain harvesting neared completion in the

Carolinas, and peach crops in Maryland, and West Virginia remained in good-to-excellent

condition.

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Sixth District--Atlanta

Reports from Sixth District business contacts were mixed in June and early July. Retail sales

varied by type and location, with strongest reports coming from high-end retailers and in the

areas affected by last year's hurricanes. Automobile sales continued to lag, especially in the

domestic truck and SUV segments. Housing contacts reported further declines in home sales

in most Florida markets, and some moderation was noted in other areas as well.

Nonresidential construction displayed modest growth, spurred by Gulf Coast infrastructure

repairs. In coastal areas, the availability and sharply higher cost of insurance coverage has

emerged as a major concern for homeowners and businesses. Reports on factory activity

were generally positive, and transportation contacts continued to report they were operating

near capacity. Tourism contacts remained cautiously optimistic. Lower real estate loan

demand was noted in most areas outside the Gulf Coast. Reports of shortages of skilled labor

continued to be widespread. Price pressures persisted, although the ability to pass on higher

costs remained limited. Agricultural production was adversely impacted by drought

conditions in many areas. Oil production in the Gulf Coast improved.

Consumer Spending

Retail sales performance was varied in June and early July. The strongest reports came from

merchants in Katrina-damaged areas and from high-end retailers, whereas several low-end

retailers noted sluggish sales. Most merchants anticipated modest sales growth over the next

few months.

District vehicle sales remained mixed. Domestic dealers struggled with declining demand for

full-sized trucks and SUVs despite increased promotional rebates and incentives. In contrast,

most foreign auto distributors reported another good month.

Real Estate

Reports from single-family homebuilders and Realtors indicated that housing activity outside

of the hurricane-affected areas weakened in June and early July, and inventories of unsold

homes rose. Most of the weakness remained concentrated in Florida, where contacts noted

that home sales declined further and some homebuilders started offering various sales

incentives. Florida Realtors reported that more sellers were lowering the asking price on

existing homes than earlier in the year. The higher cost and lower availability of homeowner

insurance in coastal areas was said to be one factor that was limiting the pace of home sales.

Sales of condominiums declined further in several Florida markets, and in some cases

condominiums were being reconverted back into rental units.

District nonresidential commercial contractors reported that new development during June

and early July was slightly ahead of last year's pace. Infrastructure repairs continued to

dominate the recovery effort along the Gulf Coast, although some commercial projects have

been put on hold until after the hurricane season.

Manufacturing and Transportation

Reports on manufacturing activity were generally positive. A building products manufacturer

reported an increased volume of new orders and employment, and a manufacturer of

electrical equipment was operating at near capacity and experiencing increased order

backlogs. Defense contractors reported new orders while a manufacturer of automobile and

industrial belting and hoses is in the process of expanding because of increased demand from

local automobile assemblers. However, a furniture manufacturer reported a decline in sales,

and a supplier of pre-stressed concrete in south Florida observed a decline in new orders.

Reports from transportation sector contacts continued to be upbeat. Inter-modal centers in

Huntsville and Atlanta were reportedly benefiting from a steady growth of regional domestic

and global trade. Georgia Ports recently announced an $82 million capital improvement plan

to upgrade port facilities in Savannah and Brunswick.

Tourism and Business Travel

Reports from the tourism sector were cautiously optimistic. According to the Mississippi

Gaming Commission, employment at the ten Gulf Coast casinos is expected to approach

Pre-Katrina levels by fall. However, the availability of affordable housing was viewed as a

critical limiting factor. Despite hurricane season fears and higher gas prices, reports on

Florida's tourism sector were mostly upbeat. Traffic was reportedly higher than a year ago in

Orlando and at some coastal resorts. In Nashville, occupancies and room rates at several

hotels were higher than a year earlier.

Banking and Finance

Real estate loan activity softened further in June and early July, although a New Orleans

contact noted that real estate loans were up significantly in the Gulf Coast area. Commercial

lending remained slow overall. Credit quality continued to be strong across the District.

Overall deposit growth was flat and characterized by intense competition, although strong

deposit growth was reported by contacts in hurricane-impacted areas.

Employment and Prices

Contacts continued to report labor shortages in certain sectors. Florida builders continued to

report shortages of qualified workers in all trades, and a Tennessee temporary help agency

reported that business was strong for high-skilled positions. However, in New Orleans, hotels

were said to have difficulty finding workers at any skill level. AirTran Airways recently

announced that it expects to add about 2,500 jobs in Georgia over the next few years.

Contacts noted continuing price pressures. A building-supply company reported that prices

for all petroleum-based products such as roofing, vinyl flooring and insulation were still

increasing. A large producer of asphalt reported that rising prices will have a tremendous

effect on the cost of state and federal highway programs. Insurance costs have also jumped

sharply higher for businesses in coastal areas. Businesses reported that they were coping with

rising input costs in various ways, including lower levels of staffing and service, and

increased productivity. Many companies continued to state that they were unable to pass on

all their energy cost increases because of competition, and were thus faced with eroding

profit margins. However, some medical service providers, attorneys, restaurants, and roofers

have reportedly been able to successfully implement price increases.

Agriculture and Natural Resources

Drought-like weather has impacted farmers across the District, with low-moisture conditions

most dramatic in areas of Alabama, Georgia, and Mississippi. Most areas without irrigation

systems were experiencing crop losses. Contacts reported that Florida's citrus crop this year

would be lower because of last year's storms and disease problems, and could be impacted

further by the shortage of migrant labor.

Crude oil availability from the Gulf of Mexico continued to improve in June with one major

platform returning to production. Reports also indicated strong demand for labor and

equipment.

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Seventh District--Chicago

Economic activity in the Seventh District expanded at a moderate pace again during June and

early July, though a few reports suggested the pace of expansion slowed from earlier in the

year. Consumer spending continued to increase modestly. Business spending and hiring

increased again. Manufacturing activity remained strong, though some contacts noted a

slower pace of growth than in the previous reporting period. Residential construction and real

estate activity continued to decline from high levels. Demand for commercial real estate

space continued to increase; however, the pace of new commercial construction slowed.

Mortgage demand was down again, while the expansion in commercial lending continued at

a slower pace than in the previous report. Nonlabor input cost pressures remained firm in

June and early July, but increases in retail prices and wages were modest. Growing

conditions for corn and soybeans retreated some, due to below-average rains.

Consumer Spending

Consumer spending continued to increase modestly in June and early July. Retailers in

Illinois and Indiana said June sales were "OK" or "pretty good;" nonetheless, they said sales

were generally a bit below expectations. Retail sales in Michigan during June were held back

by sluggish results in vacation destinations, but one analyst said that overall activity has been

busier so far in July. High gasoline prices reportedly dampened spending in the District, both

by squeezing budgets and by leading shoppers to make fewer trips to the store. Retail

inventories were at desired levels. Retail promotions generally followed the usual seasonal

patterns, though some big grocery chains were said to be advertising more aggressively than

normal. Auto dealers said that vehicle sales have held up well and showroom traffic has been

brisk relative to earlier in the year. New vehicle inventories were moving down toward

desired levels. Tourism activity in Michigan was running below a year ago.

Business Spending

Business spending and hiring expanded again in the District. For the most part, capital

spending continued to increase at similar rates as in the previous reporting period. Several

small manufacturers maintained their plans to increase capacity, and a bank in the District

reported an increase in information technology spending by its commercial lending divisions.

Rail freighthauling expanded at slower pace than in recent months, as shipments of lumber

and other construction materials moderated. Overall labor market conditions were little

changed, with small gains in employment on net. Factory employment ticked up, led by

growth at heavy equipment manufacturers and toolmakers. Shortages of skilled

manufacturing workers persisted, and there were new reports of difficulty in filling

engineering and finance job openings. A temporary help services provider said that demand

growth in the District held firm but continued to moderate in the rest of the country.

Construction and Real Estate

Residential construction and real estate activity continued to decline from high levels in most

areas, though there were a few regions with persistent strength. One large builder reported

new orders have declined, but a solid backlog of orders was keeping construction activity

afloat. Existing home sales slowed as well, though Realtors in Wisconsin noted an uptick

during June. Most builders and real estate agents indicated that the supply of new and

existing homes for sale was growing. The pace of new commercial construction moderated;

however, demand for commercial real estate space continued to strengthen. A developer in

the Chicago-area said that net absorption of office space remained strong in the second

quarter, contrary to expectations, with demand driven by a large number of small deals. High

construction costs were reportedly constraining development of speculative office space. A

developer in Iowa that also operates in other parts of the country said that it had passed on

three developments and moved to reduce its "bare ground" holdings after observing "an

abrupt halt" in sales of both commercial and residential space.

Manufacturing

Manufacturing activity remained strong during June and early July, though some contacts

reported a slower pace of expansion than earlier in the year. Demand for heavy equipment

continued to be solid, led by the mining and energy sectors. Orders for large construction

equipment typically used in nonresidential projects were holding up well, while orders for

smaller equipment were weakening. Heavy-duty truck orders fell in June, largely because

order books are full for 2006 and there are no more spots to pre-purchase trucks before new

EPA standards go into effect at the beginning of next year. Nonetheless, the decline in orders

was less than expected. Orders for medium-duty trucks remained solid, and demand for

trailers was steady at high levels. Toolmakers reported strong demand and high order

backlogs, and said that their production was running at high capacity utilization rates. Steel

producers reported strong demand growth from most markets. Inventories at steel service

centers were increasing but remained in line with sales. Cement consumption showed robust

growth year-to-date, but growth was expected to tail off in the second half. A wallboard

producer noted its order growth remained very strong and production continued at high rates,

but added that it has yet to see much of a slowdown in bookings from residential builders.

Banking and Finance

Lending activity moderated further. Bankers noted additional declines in mortgage

applications for both purchases and refinancing, though the fall-off in refinancing was more

marked. Demand for home-equity loans was "losing steam," with the total volume of loans

outstanding down slightly and usage rates unchanged. Mortgage delinquencies remained low,

while delinquencies on home equity loans edged up. Credit scores on newly approved loans

increased at one bank, though the improvement largely reflected lending officers stepping up

their scrutiny and turning down less-qualified borrowers. Commercial lending continued to

expand, but at a slightly slower pace than earlier in the year. Commercial lending conditions

were "crazy competitive" according to one contact, with banks turning away from more deals

because the customers were asking them to give up too many protections. Spreads edged

down further in some segments, and fee income declined. Commercial credit quality

remained in good shape. Deposits increased at a steady pace, but pricing was competitive and

net interest margins were narrowing.

Prices and Costs

Nonlabor input cost pressures remained firm in June and early July, while increases in retail

prices and wages were modest. Almost all contacts reported higher energy costs. One

manufacturer said it had not seen any further increases in plastics and resin costs, but they

were expecting surcharges in the coming months. Other materials prices were increasing as

well, including copper, steel, concrete, wallboard, and paper. The ability to pass these cost

increases on to customers varied. Price increases at the consumer level were modest. Prices

of used compact cars were up sharply, while prices of used full-size sport utility vehicles

declined noticeably, raising automakers' concerns about residuals on leased vehicles.

Apartment rents in Michigan were little changed. Wage pressures were limited to certain

professions facing skill shortages.

Agriculture

Most of the District experienced below-normal precipitation during June and early July. The

lack of rain expanded the drought in Iowa, and extended it into Illinois and Wisconsin. Some

ponds in Iowa dried up, forcing ranchers to haul water for livestock. Crop conditions

deteriorated in all District states except Indiana. Nonetheless, corn and soybean conditions

remained better than a year ago in Illinois and Indiana. Subsoil moisture in parts of the

District sustained plant growth, but subsoil reserves were drained in many areas. The lack of

rain also reduced potential crop yields, with the possibility of greater damage from the recent

hot weather. Crop futures prices increased relatively more than cash prices, due to the stocks

of crops left over from last year. Hog and cattle prices increased from the previous reporting

period. Higher operating costs, especially for energy and interest on loans, exacerbated cash

flow problems. Some farmers took out operating loans for the first time in years.

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Eighth District--St. Louis

Reports from business contacts in the Eighth District were mixed in June and July. While the

services sector continued to expand, reports in manufacturing did not present as clear a

picture. Many contacts in retail trade reported gains relative to last year, although reports

from auto dealers indicated decreases in sales relative to this time in 2005. Commercial real

estate market conditions improved throughout the District, while home sales reports varied

across the District. Lending activity at a sample of small and mid-sized District banks

increased from late March to mid-June.

Manufacturing and Other Business Activity

In the period since our previous survey, several manufacturers announced plans to expand

operations, open new facilities, or hire additional workers, and a similar number of contacts

reported plans to close plants and lay off workers. Firms in the machinery and beverage

manufacturing industries reported plans to open new facilities in the District. Contacts in the

water transportation equipment, chemical, medical equipment, and plastics industries

reported plans to expand existing facilities and hire additional workers. In contrast, contacts

in the furniture and food industries announced plans to close plants and lay off workers in the

District. Contacts in the fabricated metal product, motor vehicle, and household appliance

industries announced plans to lay off or temporarily idle workers.

The District's services sector continued to expand in most areas. Contacts in the freight

transportation and business support services industries announced plans to expand facilities

and hire additional workers. General and big box retailers reported sales increases in June

compared with the same month in 2005. Convenience and grocery retailers reported that

year-to-date sales were up in mid-July. Auto sales were down in June and the first half of

July compared with the same period last year. Auto dealers indicated that sales of domestic

cars were particularly slow.

Real Estate and Construction

Home sales reports were mixed throughout the Eighth District. Compared with the same

period in 2005, May year-to-date home sales were up 14 percent in Memphis and 2 percent

in Louisville; in contrast, May year-to-date home sales were down over 3 percent in Little

Rock and remained unchanged in greater St. Louis. Residential construction remains weak

throughout most of the District. May year-to-date single-family residential permits declined

in most areas. Compared with the same period last year, permits declined 44 percent in

Louisville, 14 percent in St. Louis, over 6 percent in Little Rock, and over 2 percent in

Memphis. Permits, however, increased by 30 percent in Fayetteville, Arkansas and Jackson,

Tennessee.

Commercial real estate market conditions improved throughout much of the District.

Contacts in St. Louis reported that office vacancy rates are at their lowest level in several

years, and contacts in Memphis reported increasing demand for office space. In Louisville,

contacts reported that the central business district office market is doing well and that

industrial space is in high demand. In Memphis, contacts reported that commercial and

industrial construction markets are strong. Contacts in Fort Smith, Arkansas reported that

commercial development is expanding, and contacts in St. Louis reported that a large

industrial park is pending final approval.

Banking and Finance

Total loans outstanding at a sample of small and mid-sized District banks increased 2.7

percent from late March to mid-June. Real estate lending, which accounts for 72.0 percent of

total loans, increased 2.0 percent. Commercial and industrial loans, accounting for 17.9

percent of total loans, increased 6.6 percent. Loans to individuals, accounting for 4.4 percent

of total loans, fell 4.9 percent. All other loans, roughly 5.8 percent of total loans, rose 4.8

percent. During this period, total deposits at these banks increased 0.6 percent.

Agriculture and Natural Resources

Dry conditions throughout most of the District have helped corn, soybean, sorghum, and

cotton development. As of mid-July, at least 88 percent of all major District crops were rated

in fair or better condition. The winter wheat harvest is at least 95 percent complete in all

District states, except Indiana, where about 70 percent of the harvest is complete. Total

winter wheat production in the District states is expected to be nearly 50 percent larger this

year than last year. Because of the dry weather, pasture conditions have deteriorated

throughout the District, and 60 percent of the pastures in Mississippi and Missouri are rated

in poor or very poor condition.

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Ninth District--Minneapolis

The Ninth District economy grew moderately since the last report. Increases in activity were

noted in consumer spending, manufacturing, mining, energy, agriculture, and commercial

real estate. Meanwhile, residential real estate and construction softened. Tourism and

commercial construction were steady. Since the last report, labor markets showed signs of

tightening and wage increases were moderate. Significant price increases were noted for fuel,

shipping, and brass.

Consumer Spending and Tourism

Overall consumer spending increased slightly. A major Minneapolis-based retailer reported

same-store sales up almost 5 percent in June compared with a year ago. A manager of a

Minneapolis-area mall reported that recent sales were about 4 percent higher than a year ago;

apparel sales were particularly strong. In Montana, a mall manager noted that most stores

posted sales gains in June compared with a year ago, and overall year-to-date sales were

much higher than last year.

A Minneapolis area domestic auto dealer noted weak June sales, but an uptick in early July;

overall truck sales were slow. Recent domestic vehicle sales were very slow, while foreign

car and light truck sales were relatively strong, according to an auto dealer in Minnesota.

Despite higher gas prices, overall tourism activity was on a par with a year ago. A recent

survey of Minnesota hotel and resort owners showed that about 75 percent of respondents

expect the summer tourism season to match or exceed last year. A chamber of commerce

official in northeastern Minnesota observed that traffic and lodging levels in May and June

were about the same as a year ago. In the Upper Peninsula of Michigan, a tourism official

said that tourism businesses are hoping for a summer as good as last year's strong season, but

they don't expect to surpass it. A South Dakota tourism official reported that activity was

level compared with last summer. Tourism officials in Montana expect the summer season to

equal or surpass year-ago levels. Visits to Yellowstone National Park were up 2 percent in

May from a year earlier, while Glacier National Park visits were down 23 percent because of

late road openings due to heavy winter snowfall.

Construction and Real Estate

Commercial construction was steady, while residential construction slowed. Building began

on two large biodiesel plants in North Dakota, at a combined cost of more than $100 million,

and plans for a $120 million ethanol plant were announced. A 550,000-square foot multi-use

development will accompany construction of a new hospital in a Minneapolis suburb.

However, June year-to-date residential permits were down from 2005 levels in Rochester,

Minn., and Grand Forks, N.D. In contrast, residential permits were up in Fargo, N.D., and

Sioux Falls, S.D. Home building continues at a strong pace in western Montana, particularly

for condominiums and rental properties.

Residential real estate was slow, whereas commercial activity was brisk. June sales volume

was down 14 percent from year-earlier levels in Minneapolis-St. Paul. Realtors in Fargo and

Sioux Falls reported slower sales than at this time last year. A director in western Montana

reported softening as homes stayed on the market longer and prices remained level.

Meanwhile, the Minneapolis-St. Paul industrial market finished its sixth consecutive quarter

of positive absorption. An analyst characterized the office market there as having finally left

its recovery phase and headed into an expansion.

Manufacturing

Manufacturing activity expanded. A July survey of purchasing managers by Creighton

University (Omaha, Neb.) indicated robust growth of manufacturing activity in the Dakotas

and Minnesota. A western Wisconsin paper mill that closed in March due to bankruptcy may

reopen under new ownership by the end of the summer. A digital billboard maker in South

Dakota is greatly expanding production due to strong demand. To keep up with increased

orders, a Minnesota metal fabricator is doubling the size of a factory. However, due to weak

sales, a light truck assembly plant in Minnesota has temporarily shut down.

Energy and Mining

Activity was up slightly in the energy and mining sectors. Oil and gas exploration and

production in the District increased since the last report. In addition, expansion in the

alternative energy industry continued. Mining production is robust across the District. An

official from an iron mining company expects strong production at District mines throughout

the year. Several companies continue to explore new mining sites throughout the District.

Agriculture

Agricultural activity improved since the last report. Crop progress is ahead of last year and

the five-year average for most District crops. In addition, the number of cattle on feed

increased from a year ago. Prices increased for most District agricultural products, especially

for wheat and calves. However, lack of rain has increased dry conditions from central

Montana through the Upper Peninsula of Michigan. In addition, exceptional drought has hit

the central portion of the Dakotas and is stressing small grain production.

Employment, Wages and Prices

Since the last report, labor markets showed signs of tightening. A temporary staffing agency

survey of Minneapolis-St. Paul companies showed that 33 percent of respondents expect to

increase staffing levels during the third quarter, while 13 percent expect declines. A medical

device manufacturer plans to transfer 300 jobs to Minneapolis over the next two years. An

architectural and engineering firm in northern Minnesota reported difficulty filling open

positions. Results of a recent St. Cloud (Minn.) Area Business Outlook Survey indicated the

tightest local labor market conditions since December 1999. A Montana bank director noted

that skilled and unskilled workers are in short supply in a number of areas.

In contrast, a financial services company recently announced plans to close a Minnesota call

center due to company restructuring that will lay off 450 workers. A Minneapolis area

hospital recently announced plans to cut 250 jobs in response to stagnant patient admissions

and low government reimbursement rates.

Overall wage increases were moderate with a slight increase in trend for lower-skilled jobs in

some parts of the District. The aforementioned St. Cloud survey shows that 51 percent of

respondents expect to increase employee compensation over the next six months. Employers

hiring workers for low-skilled positions in Billings, Mont., have recently raised pay to attract

qualified applicants.

Price increases were noted for fuel, shipping, and brass. Early July gasoline prices in

Minnesota were more than 80 cents a gallon higher than a year ago. Two manufacturers in

the Minneapolis-St. Paul area noted that fuel surcharges have increased shipping costs

between 10 percent and 20 percent. Liquified petroleum gas prices were about 30 percent

higher than a year ago. Brass prices were up significantly compared with a year ago. Several

bank directors noted a slowing in the increase in health care costs over the past year for

companies in their area.

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Tenth District--Kansas City

The Tenth District economy expanded moderately in June and early July. Consumer spending

increased, labor markets continued to firm, and energy activity rose further. Growth in

manufacturing activity also remained solid, although firms expressed less optimism about

future activity. Drought conditions eased in the agricultural sector but were still a concern.

Commercial real estate conditions were little changed, and residential construction remained

sluggish. Wage pressures and wholesale price pressures increased somewhat, while retail

price pressures held steady.

Consumer Spending

Consumer spending expanded moderately in June and early July. Most retail contacts

reported that sales were higher than in the prior survey period and above year-ago levels. In

addition, a larger share of store managers was satisfied with inventory levels than in the

previous survey. Retail contacts generally remain optimistic about sales in the next several

months. Auto dealers reported that sales in June and early July increased from the previous

survey period, but were below those of a year ago. Sales of fuel efficient cars were said to be

strong at some dealerships. Inventory levels were reported to be satisfactory, and contacts

generally expect further sales increases in the months ahead. Travel and tourism contacts

reported activity improved modestly since the previous survey. Passenger counts at most

District airports edged up, and hotel contacts said that occupancy rates were generally at or

above year-ago levels. Travel and tourism contacts continue to expect solid activity through

the remainder of the summer travel season.

Manufacturing

Growth in manufacturing activity in the District remained solid in June and early July, but

optimism about future activity declined. Production, shipments and new orders increased.

However, plant managers were not as optimistic about future activity, especially new orders,

as they were in the prior period. Expectations for future capital spending were also low for

the second survey in a row. Several contacts noted difficulty acquiring materials, including

petroleum-based chemicals and steel, and these problems are not expected to be resolved

quickly.

Real Estate and Construction

Residential construction remained below year-ago levels, while commercial real estate

activity was generally unchanged. As in the previous survey, most home builders reported

that starts were sluggish, and contacts in most parts of the District do not foresee an increase

in home construction in the next several months. In some areas, the slowdown in home

building was reported to be causing substantial delays in payments to subcontractors. For the

most part, there were no significant problems reported in obtaining construction materials,

and none are anticipated to arise heading forward. Residential real estate agents in most areas

said that home sales increased slightly since the previous survey but remained below

year-ago levels. Inventories of unsold homes continued to rise across the District, in part due

to an increase in foreclosures of low-end homes. However, many real estate agents noted that

the high-end market was weak, as well. Home price appreciation remained modest in most

areas, and contacts expect that both home sales and prices will generally remain flat going

forward. Mortgage lenders reported that demand for home purchase loans was up slightly

since the previous survey, while demand for refinancings was unchanged and remained

below year-ago levels. Lenders generally expect both home purchase loans and refinancings

to hold steady in the coming months. Commercial real estate activity was mostly flat in June

and early July. Vacancy rates and rents for commercial space were unchanged in most

markets and, for the most part, commercial real estate agents do not expect conditions to

change much in the months ahead.

Banking

Bankers reported that both loans and deposits increased since the last survey, leaving

loan-deposit ratios unchanged. Demand rose slightly for commercial and industrial loans,

commercial real estate loans, and construction loans, while demand for consumer loans

declined somewhat. On the deposit side, demand deposits, MMDAs, and large CDs were all

higher than in the prior period. All respondents raised their prime lending rates and consumer

lending rates since the last survey, while most of them reported that lending standards were

unchanged.

Energy

Energy activity continued to expand in the District during June and early July. The count of

active oil and gas drilling rigs in the region increased slightly since the prior survey period

and remained well above year-ago levels. Many contacts continued to report that shortages of

equipment and labor were constraining drilling activity, although there were some reports

that rigs had become more readily available in certain areas. Drilling is expected to expand

further in the months ahead.

Agriculture

Drought conditions eased in some areas in June and early July, although a lack of moisture

remained a problem in much of the District. The District wheat crop was down from last year

due to the drought, but in some areas the harvest was not as poor as had been expected. The

development of spring crops is slightly ahead of the 5-year pace, with the corn crop generally

reported to be in good shape. Some pastures, however, continue to weaken, causing

producers to use supplemental feed or trim herds. On the financial side, respondents report

recent weakness in loan repayment rates as well as lower-than-expected farm capital

expenditures. Farm incomes are expected to fall this year due to higher fuel costs and the

effects of the drought.

Labor Markets and Wages

Labor markets continued to firm in June and early July, and wage pressures increased. As in

previous surveys, hiring announcements outpaced layoff announcements by a wide margin.

Many of the new jobs announced were at manufacturing firms, and several call centers also

announced plans to add workers. The percentage of contacts reporting labor shortages was

similar to the previous survey, but the fraction of firms reporting above-normal wage

increases edged up. Among the workers reported to be in short supply were engineers, auto

technicians, oil and gas workers, and skilled manufacturing workers.

Prices

Wholesale price pressures edged up slightly in June and early July, while retail price

pressures were little changed. The percentage of manufacturers reporting higher prices for

raw materials was basically unchanged from the previous survey. However, the share of firms

reporting higher finished goods prices increased. Expectations for future increases in raw

materials and finished goods prices were both slightly higher than in the previous survey

period. Home builders indicated that materials costs edged up slightly from the previous

survey, and they expect further increases going forward. Both the share of retailers reporting

higher prices than a year ago and the share planning price increases in the next several

months held steady.

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Eleventh District--Dallas

Eleventh District economic activity continued to expand at a strong pace from early June to

mid-July, but there were some signs of cooling. Energy activity remained robust, and activity

was still quite strong in the manufacturing and service sectors. Retail sales reports continued

to weaken, with high gasoline costs squeezing other consumer spending. Nonresidential

construction strengthened, and the level of new home and apartment building was

unchanged, but there was a noticeable softening of demand for homes and apartments.

Financial service firms reported favorable conditions, although there was some weakening of

demand for consumer loans. Agricultural conditions remained dry.

Prices

Price pressures were mixed. High energy costs continued to be reported, and prices were

rising for many products that contain oil or one of its derivatives. Transportation costs were

also up. Still, natural gas prices are lower, and a few industries reported that weakening

demand was making it more difficult to raise selling prices. After increasing for several

months, some product prices declined slightly in recent weeks, such as those for lumber and

most petrochemicals made with natural gas.

Surging demand for gasoline and geopolitical tensions pushed oil prices to record levels in

current dollars--rising briefly above $78 per barrel. Crude inventories are 11 percent above

the 5-year average. Weak demand throughout most of the period pushed natural gas prices

down to $5.60 per million Btu at Henry Hub. Natural gas in storage is 20 percent above

normal and at the highest level in 8 years for this time of the year, but rising crude prices and

the threat of tropical weather provide some support for prices.

Labor Market

All sectors of the economy report growing difficulty finding qualified workers, and in some

instances, the challenge to obtain workers with particular skills has become intense. Wages

are increasing for some positions. Temporary service firms say pay rates have finally

increased--as much as 5 to 10 percent--and it has become harder to find workers. Some

contacts, particularly those in the restaurant industry, expressed concern that tightening

immigration enforcement will make it even more difficult to find and retain workers, pushing

up employment costs.

Manufacturing

Manufacturing activity expanded at a solid pace, but there was some cooling, particularly for

materials used in home construction. Food and apparel manufacturers reported continued

solid demand. Sales of paper products were unchanged, but contacts said insufficient

capacity had pushed up prices.

Reports from construction-related manufacturers were mostly still strong. Some contacts

noted recent softening which they attribute to weather disruptions and a decline in demand

from builders. Primary metals producers said a rebound in nonresidential construction nearly

offset cooling in the housing market. Producers of stone, clay and glass said demand mostly

held steady at high levels. Lumber and fabricated metals manufacturing was unchanged.

Overall high-tech manufacturers say production continued to grow at a good pace since the

last survey. Demand is strong for most devices, particularly cell phones, but weaker sales of

PCs led to excess capacity and a build up of inventory for some chips. Sales of

semiconductor manufacturing equipment have been lower than expected, with some orders

being cancelled or delayed. Industry executives say this cooling demand will not necessarily

lead to a downturn in the semiconductor cycle because PCs are a smaller percentage of the

market than in previous years.

There was little change in the demand for chemicals, except for PVC, where demand has

weakened with slowing housing construction nationwide. Refining utilization on the Gulf

Coast pushed up to 95 percent, the highest levels since the hurricanes last year. However,

utilization rates remain below normal for late June and early July. Mechanical problems are

common, and refiners are delaying maintenance due to high cost, labor shortages, or inability

to schedule needed work. Refiners also are earning strong margins of $15-$20 per barrel,

making them reluctant to reduce runs.

Services

Temporary service firms report that activity levels remain high and revenues are up

significantly compared with last year. Legal firms report continued strong demand,

particularly from the business sector. Accounting firms report steady activity with some signs

of growth.

The railroad industry continues to operate near full capacity and expects to set record volume

levels this fall. Recent increases in traffic volumes were observed for coal, metals, petroleum

products, grain and crushed stone for highway construction. Traffic volumes declined for

products supplying home building, such as metallic ores, lumber and non-metallic minerals.

Trucking cargo volumes continue to rise, but contacts say the rate of growth is slightly

slower than a year ago. Shipping firms say cargo volume has increased modestly over the

past month. Demand was led by durables in wholesale, manufacturing, and retail areas.

International traffic continued expanding strongly. The airline industry reports very strong

demand and growing domestic capacity.

Retail Sales

Retail sales continued cooling. Reports remain very mixed, and contacts say customers are

still modifying purchasing patterns because high energy costs are taking a larger share of

their paycheck. For example, a food retailer noted increased sales which he attributes to

lower income customers cooking at home instead of eating at restaurants. National retailers

say that sales to stores in Texas are stronger than in the country as a whole.

Auto sales have been soft, according to dealers, who say high gasoline prices are dampening

sales of SUVs and other vehicles that obtain relatively poor gas mileage. Inventories and

inventory costs are high at dealerships and factories.

Construction and Real Estate

Home demand remains strong, according to contacts who say there has been an acceleration

in relocations. Demand is particularly strong for homes priced over $200,000, but sales to

first-time buyers continued falling. The market is showing more signs of cooling--buyers are

taking longer to make decisions, and inventories are rising. Building continues to be robust,

and there has been an increase in builder incentives, especially in Austin, Dallas and Fort

Worth. Apartment leasing slowed over the past six weeks, which contacts blame partly on the

increase in builder incentives luring renters away from apartments. Office markets continued

to improve over the past six weeks. Occupancy rates are edging up, and rents are up

significantly. Commercial construction activity is rising, especially in Dallas.

Financial Services

The financial services industry continues to report favorable conditions. Demand for

commercial loans has been very strong, but there has been some softening in demand for

loans from consumers, particularly for automobiles and mortgages. Deposit growth has been

"pretty good," which one contact attributed to a "flight-to-safety" because of recent stock

market volatility. Credit quality is good, with few past due or problem loans. Some contacts

say there has been some weakening of credit structures, with bankers cutting corners,

weakening loan covenants or using "air ball" financing, where a portion of the loan is backed

by expectations of business growth rather than hard assets.

Competition for commercial loans is intense, according to respondents, who say it is

affecting pricing but not credit quality. One firm reports exceeding their latest monthly goal

by a factor of three times and said there appears to be a lot of momentum for future growth.

Rising interest rates have caused some clients to rethink deals but none have fallen through.

One contact referred to activity as "scary good" because loan quality is better than expected

but he fears lenders might be missing something important as they continue to aggressively

compete for new loans.

Energy

The rig count continues to rise. Weaker natural gas prices have led some drilling to switch

from natural gas to oil, although producers generally believe the recent the price decline is

mostly weather-related and temporary. The recent cooling in activity has caused day-rates for

land rigs and the price of some other services to rise more slowly after a long period of

sustained increases. Demand for oil services remains strong, with continued heavy backlogs

and labor shortages.

As hurricane season approaches, a few rigs are leaving the Gulf of Mexico in search of

higher rates or lower insurance premiums. Hurricanes are causing a general rethinking of

drilling activity in the shallow waters of the Gulf of Mexico. Insurance costs have

skyrocketed in the Gulf as a result of last year's hurricanes.

Agriculture

Rain in early July improved soil moisture conditions in a few areas, but drought continues to

stress crops and forage across much of the District. Dryland corn, sorghum and pecan

acreage production is "way off" normal levels, and most of the corn harvested in North

Central Texas is being made into silage. The cotton crop is expected to yield 3.2 million

fewer bales than last year. Irrigated crops were mostly in fair shape.

Range and pasture conditions are poor. Hay supplies remain short, and stock tanks are low.

As a result, livestock producers continue to liquidate herds, and some have completely sold

out. Good demand for dairy products and solid cattle prices are helping ranchers and dairy

farmers.

Bankers expressed concern about the financial condition of producers because of drought,

high fuel prices and rising borrowing costs.

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Twelfth District--San Francisco

The Twelfth District's solid economic expansion continued during the survey period of early

June through mid-July, but reports indicated that the pace of growth moderated somewhat.

Wage and price inflation were limited on net, although wage growth remained rapid for

selected worker groups with specialized skills. Growth in retail sales was modest, falling

below some retailers' expectations, while demand for services remained robust.

Manufacturers saw solid demand, as did producers of agricultural and resource-related

products. Residential construction activity, sales, and price appreciation continued to soften

in most areas, while activity in commercial real estate markets picked up further. District

banks reported strong loan demand on net but slight slowing for some categories.

Wages and Prices

Contacts reported that upward pressure on prices was modest overall. Significant increases in

final prices continued to be largely confined to products and services for which energy costs

are a significant component, such as construction and transportation services. Some contacts

reported increased pricing power for selected retail items and manufactured goods, while

others noted that increases in input costs have moderated over the past few months.

District labor markets tightened a bit further. Wage increases were moderate overall,

reportedly in the range of 3 to 4 percent on an annual basis, but they remained more rapid for

workers with specialized skills in many sectors. Contacts in various sectors reported that

employers increasingly relied on hiring bonuses and incentive packages to attract and retain

qualified workers. Growth in employers' costs for employee benefits, particularly for health

insurance, reportedly has subsided from the rapid pace reported in previous survey periods.

Retail Trade and Services

Retail sales grew modestly on net, reflecting slight weakening relative to the previous survey

period. Sales held steady or grew slightly for department stores and various small retail

establishments but reportedly were below some retailers' expectations. Demand for

automobiles was mixed. High gas prices reportedly held down demand for large SUVs and

light trucks, keeping inventories at very high levels, but sales of selected fuel-efficient

imported vehicles remained strong.

Most service providers continued to see robust demand. Activity was brisk in the health-care

services and professional services sectors. Providers of telecommunications and

transportation services saw strong demand. Travel and tourist activity was robust in most

major markets. In Hawaii, further increases in domestic tourist arrivals and spending more

than offset a continued decline in visits by Japanese tourists. Hotel occupancy rates generally

remained high and room rates rose further there and in other tourist destinations throughout

the District.

Manufacturing

Demand for District manufactured products was solid on net during the survey period of

early June through mid-July. Orders and sales of semiconductors were strong and inventories

were balanced; capacity utilization has been running at or above 90 percent for many

products, and the industry recently increased its 2006 sales forecast. Production activity for

commercial aircraft remained vigorous in the Pacific Northwest, as further growth in orders

and an existing backlog kept aircraft manufacturing establishments operating near full

capacity. Contacts reported solid demand growth and balanced inventories for apparel and

processed food. Conditions were mixed for manufacturers of building materials, with some

seeing modest sales growth and others facing weaker demand due to recent declines in

residential building activity.

Agriculture and Resource-related Industries

Demand for District agricultural and resource-related products was strong. Sales were robust

for most crops, especially for organic products, and inventories generally were balanced.

Prices received for some crops were high compared with last year, due in part to supply

constraints caused by earlier excess moisture and cool weather in various parts of the

District. Contacts reported that high costs for fuel and fertilizers remained a concern, putting

upward pressure on final prices. In the resources sector, producers of oil and natural gas saw

robust demand and little or no excess capacity, although one contact noted that inventories of

natural gas remained high, causing prices to decline.

Real Estate and Construction

Activity in residential real estate markets continued to decelerate in most areas, while activity

in commercial real estate markets expanded further. Contacts from Arizona, California, and

Nevada reported that the pace of home sales and price appreciation moderated further. In the

Pacific Northwest--where residential real estate markets had remained hot earlier this

year--home sales reportedly softened and permits for new residential construction fell, with

the exception of continued robust activity in the market for condominiums in downtown

Seattle. Residential real estate markets also remained hot in most parts of Utah, especially in

Salt Lake City. On the commercial side, office and retail vacancies fell further throughout the

District, and rental rates have been rising steadily this year. Construction activity for

commercial and public structures remained strong in most areas, largely offsetting slower

home building. In some rapid growth areas such as Salt Lake City and parts of Oregon,

builders continued to face significant cost increases due to tight supplies of skilled workers

and selected construction materials.

Financial Institutions

District banking contacts reported strong loan demand on net but slight slowing for some

categories. Commercial and industrial lending remained robust. By contrast, residential

mortgage origination and refinancing activity slowed further, and some contacts noted slight

weakening in demand for consumer loans. Scattered reports indicated slight erosion in credit

quality for residential mortgages and consumer loans.

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Last update: July 26, 2006